While some investors may find short selling stocks to be appropriate to their investment needs, there are considerable risks involved, and some broker-dealers have been accused of overcharging clients for borrowing stock to short.
What Is Short Selling?
To short sell a stock (also known as going short) is to make an investment that becomes profitable when the stock declines in value. It’s the opposite of “going long”, which is buying a stock, and making profit when it goes up in price.
The hope with going long is that you can “buy low, sell high”. When you short a stock, you essentially sell it first, and then buy it back later. The hope is that you can “sell high, buy low”.
In order to short a stock, you have to borrow it from someone who owns it, and then liquidate your position (cover the short).
All stock speculating carries some risk, but shorting carries the potential for more losses than going long. If you take a long position, you can only lose the money you invest. Since the stock can only go to $0, there is a floor on how much you can lose, which is 100% of your investment.
With short selling, there is no limit on the amount of money you can lose. Since a short trade loses the investor money when the stock goes up in price, and there’s no ceiling on how high a stock can go, there’s no limit on losses from a short trade.
Because losses on a short sale are unlimited, short sellers have to post margin as collateral against losses.
Short Selling Borrow Cost
Short sellers pay a borrowing fee when they short a stock. The cost to borrow most stocks is often less than 1%. However, when there is less of the stock available to borrow for shorting, the borrow fee can be significantly higher. For instance, the borrow rate for the red-hot Beyond Meat (BYND) has been very high in 2019. At that rate, short sellers would have a very hard time earning a return.
Were You Overcharged Fees For Shorting Stock At Your Brokerage?
There is speculation that some discount brokerages have charged clients an unreasonably high borrow fee for shorting stocks. Broker-dealers have a responsibility to charge reasonable fees to their clients.
If you believe that your broker charged you unreasonable borrow fees for short selling stocks, we’d like to hear from you.
Silver Law Group represents investors in securities and investment fraud cases. Our lawyers are admitted to practice in New York and Florida and represent investors nationwide to help recover investment losses due to stockbroker misconduct. If you have any questions about how your account has been handled, call to speak with an experienced securities attorney. Most cases are handled on a contingent fee basis, meaning that you won’t owe us until we recover your money for you. Contact us today and let us know how we can help.