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sounds good JH, here is an example: say I've got 100K shares but...

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resourceboom

872 Posts.

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09/12/16

17:50

Post #: 21236726
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Originally posted by jhunt ↑

Jd, I don't have all the answers, but this may help:

1. The fee varies, depending on the volume of shares available to be lent for shorting. As the supply dries up, the annual % fee charged goes up. Standard range looks to be between 5 to 15% pa. The law of supply and demand applies.

2. Why lend to someone you know is going to try to depress the value? Simple- you have a long term conviction view of a share- but the share is not giving you an income. So, you loan the share out to the bad boy on the block for a decent fee. He plays with it for a bit, then hands it back to you, somewhat damaged. Eventually the share not only returns to its original price, but increases to its intrinsic value. The market exerts its leveling power. In the meantime, you got your fee. It all works out. The only people who get burnt are those who have to sell, or who panic and sell.

3. Is there a term to the contract? No. The borrower can give it back any time, and the lender can request it back any time.

4. Are there any other costs? Yes. The borrower must put up 150% (as little as 105% if you are a big co) of the value of the shares borrowed as collateral. If the SP goes down, some of this can be claimed back. If the sp goes up, the borrower may need to top up the margin account (margin calls). Of course, when you first sell a share you don't own, you get to keep all of the proceeds.

A shorter fears a sharp increase in the price (margin calls), and large shorters will do everything in their power to keep a lid on the price until they close out. Apparently anything.

Of course shorting can sometimes go terribly wrong- eg when a shorter targets a share that is very responsive to positive developments in the market or wider economy, or has fundamentals that are simply too dynamic.

Others may be able to add to the picture.

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sounds good JH, here is an example:

say I've got 100K shares but want 200K shares,
and I'm assuming that the shorters will allow me to buy in cheaper but the price will then go back to $8.50 within say 1 year.

starting position
100K @ $8.50 = $850K
loan to shorters, say 5% for 6 months = $51K

then price goes to 4.32
I buy my extra $100K @ $4.32 = $432K-51K cash from shorters = $381K spent

ending position
1 year later price back to $8.50
200K @ 8.50 = $1.7 MILL
this cost me $381K extra but made me $469K (850-381)

guess you need to have conviction in the stock and that the shorting is only temporary

ACX Price at posting: $4.32 Sentiment: Buy Disclosure: Held
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