Question about Selling short and dividends

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When you short a stock are you responsible to pay out any dividends that the company offers while you still hold the stock?

If not, then which stock holders do not recieve dividends (there isn't anyone who knows that they are holding theoretical shares right?)

Also, when you short a stock, and therefore there are theoretically more shares in circulation, and there is an issue that all shareholders vote on then how is it determined which shareholders are not allowed to vote? Or, are there just more people who are allowed to vote than there are outstanding shares?


Thanks for clearing this up.

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I found the answer to my first question about dividends:

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OK, I understand the potential benefits and risks of shorting, except for one thing. If the stock I've shorted pays a dividend, am I liable for that dividend?

Yes. If you are short as of the ex-dividend date, you are liable to pay the dividend to the person whose shares you have borrowed to make your short sale. I must say, however, that if you are correct in your judgment to sell the issue short, your profits achieved thereby will certainly outweigh the small dollar amount of the dividend payout.

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what about voting rights?

[Danimal]

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how is it determined which shareholders are not allowed to vote? Or, are there just more people who are allowed to vote than there are outstanding shares?

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A proxy is a document that allows a shareholder to transfer his or her right to vote to a second party. A good portion of shareholders vote this way, but it is a major reason why people say shareholers opinion are not counted. The 2nd party is usually a proxy comittee of corporate executives that are regulated by the SEC's Proxy Rules.

[adios]

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Also, when you short a stock, and therefore there are theoretically more shares in circulation, and there is an issue that all shareholders vote on then how is it determined which shareholders are not allowed to vote? Or, are there just more people who are allowed to vote than there are outstanding shares?

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Those that short a stock have to borrow the shares from those that are long. Not sure I understand your question.

[Dan Mezick]

When you are short you are obliged to pay the dividends to the account you borrowed from. Period.

This is one disadvantageous aspect of shorting.

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Also, when you short a stock, and therefore there are theoretically more shares in circulation, and there is an issue that all shareholders vote on then how is it determined which shareholders are not allowed to vote? Or, are there just more people who are allowed to vote than there are outstanding shares?

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Those that short a stock have to borrow the shares from those that are long. Not sure I understand your question.

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You didn't understand the question because I didn't understand shorting.

I didn't realize that someone who is long has to *lend* you their shares. I thought that you were just selling shares that you didn't have with the intent to buy them back at a later date to cover your position and balance things out.

The fact that they are someone elses shares that you are selling makes sense with the voting rights question...

Then again if you have to cover the dividends (which you do) then arent 2 sets of dividends being paid out on the same share of borrowed stock?

Ie.

Brokerage house ABC owns 1000 shares of XYZ corp. who pays a $.5 dividend.

You short 1000 shares of XYZ corp. that you *borrow* from ABC.

Larry Long buys the 1000 shares that you are shorting.

dividend time comes and you owe .5*1000 = $500 in dividends. XYZ corp has 1000 shares of outstanding stock that was initially sold to ABC brokerage house so they owe $500 in dividends.

Larry Long is entitled to $500 in dividends for the 1000 shares that he holds. Who gets the other $500? Is it the brokerage house that holds no shares?

If so, and I think that the brokerage house does get the dividend while holding no stock... is it posible for ME
to buy stock and loan it out so that I have no risk but still collect dividends? Or can only major brokerage houses play this game?

Thanks for your help

[adios]

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Then again if you have to cover the dividends (which you do) then arent 2 sets of dividends being paid out on the same share of borrowed stock?

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Nope.

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Ie.

Brokerage house ABC owns 1000 shares of XYZ corp. who pays a $.5 dividend.

You short 1000 shares of XYZ corp. that you *borrow* from ABC.

Larry Long buys the 1000 shares that you are shorting.

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The same shares can't be owned by the Brockerage house ABC and Larry Long. The brokerage house owns the shares that they lent to the short seller. If the brokerage house wants to sell those particular shares that they lent to the short seller, the short seller has to cover and then the brokerage house can sell.

[adios]

Not as disadvantageous as one might think since the stock goes X-Div reducing the price by the dividend amount more or less. The real disadvantage of selling short is that you're fighting the long term risk premium that the stock market pays to investors for taking the risk in buying stocks.

[player24]

Brokerage house ABC owns 1000 shares of XYZ corp. who pays a $.5 dividend. You short 1000 shares of XYZ corp. that you *borrow* from ABC. Larry Long buys the 1000 shares that you are shorting.

dividend time comes and you owe .5*1000 = $500 in dividends. XYZ corp has 1000 shares of outstanding stock that was initially sold to ABC brokerage house so they owe $500 in dividends.

Larry Long is entitled to $500 in dividends for the 1000 shares that he holds. Who gets the other $500? Is it the brokerage house that holds no shares?

If so, and I think that the brokerage house does get the dividend while holding no stock... is it posible for ME
to buy stock and loan it out so that I have no risk but still collect dividends? Or can only major brokerage houses play this game?

Answer:
The brokerage house probably does not own the shares in the first place. They are probably held by an investor who has an account at the brokerage house. Never-the-less, let's pretend ABC brokerage house owns the shares.

ABC would lend the shares to you. That does not mean that ABC no longer owns the shares - they do. They have simply lent the shares. By doing so, ABC gets "rental income" on their shares...and they sacrifice the right to vote on shareholder matters.

You have borrowed the shares from ABC and sold them to Larry. Larry has full rights of ownership - he will receive dividends and he will have voting rights.

When it domes time for a dividend payment - Company will pay dividend on 1000 shares and you will pay dividend on 1000 shares. This pool of money is then divided between Larry and the brokerage house.

If the stock declines in price after the brokerage house has lent it to you, the brokerage house will suffer a loss. They have lent you an asset, but they keep the economics of owning that asset - good or bad. There is no free lunch.

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I sincerely appreciate your patience and help in explaining this to me but I have a few follow up questions:

adios wrote:
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The same shares can't be owned by the Brockerage house ABC and Larry Long...

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From my understanding this is incorrect (although it is quite possible that it is my understanding that is incorrect.) Isn't this precicely what happens when a stock is shorted? I short 1000 shares of XYZ corp meaning that I have -1000 shares of XYZ in my portfolio. This is balanced out by someone else having +1000 shares that don't actually exist. To remedy the issues that go along with this ABC (the brokerage firm that allowed me to short XYZ corp) gives Larry Long (the person who bought stock that I don't actually own but instead borrowed) its voting rights and I pay the dividends on that stock. Now ABC has an IOU from me for 1000 shares of XYZ stock that they previously owned, they still have the stock certificate however but no longer have voting rights. Since they still have the stock certificate (minus voting rights) and Larry also has the stock certificate for 1000 shares then aren't there 2 sets of the same 1000 shares of XYZ that are balanced out by my holding -1000 shares? And if so, don't ABC and Larry Long both *own* the same shares of stock?

Adios also wrote:
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Not as disadvantageous as one might think since the stock goes X-Div reducing the price by the dividend amount more or less.....

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How does a stock go X-Div?


Player24 wrote:
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The brokerage house probably does not own the shares in the first place. They are probably held by an investor who has an account at the brokerage house.

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If investor Omar Oblivious actually owns the stock that was lent to me (when I shorted) and purchased by Larry Long then does Omar lose his voting rights? Didn't we establish above that the lender loses their voting rights?



Player24 wrote:
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ABC would lend the shares to you. That does not mean that ABC no longer owns the shares - they do.

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This contradicts the first post of Adios... Who is right?

Player24 wrote:
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They have simply lent the shares. By doing so, ABC gets "rental income" on their shares...and they sacrifice the right to vote on shareholder matters.

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What is this "rental income" that you speak of?

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When it domes time for a dividend payment - Company will pay dividend on 1000 shares and you will pay dividend on 1000 shares. [ QUOTE ]

So, in essence I have created 1000 shares of XYZ corp x-voting rights?



Thanks again for all of your help

[player24]

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I sincerely appreciate your patience and help in explaining this to me but I have a few follow up questions:

adios wrote:
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The same shares can't be owned by the Brockerage house ABC and Larry Long...

[/ QUOTE ]

From my understanding this is incorrect (although it is quite possible that it is my understanding that is incorrect.) Isn't this precicely what happens when a stock is shorted? I short 1000 shares of XYZ corp meaning that I have -1000 shares of XYZ in my portfolio. This is balanced out by someone else having +1000 shares that don't actually exist. To remedy the issues that go along with this ABC (the brokerage firm that allowed me to short XYZ corp) gives Larry Long (the person who bought stock that I don't actually own but instead borrowed) its voting rights and I pay the dividends on that stock. Now ABC has an IOU from me for 1000 shares of XYZ stock that they previously owned, they still have the stock certificate however but no longer have voting rights. Since they still have the stock certificate (minus voting rights) and Larry also has the stock certificate for 1000 shares then aren't there 2 sets of the same 1000 shares of XYZ that are balanced out by my holding -1000 shares? And if so, don't ABC and Larry Long both *own* the same shares of stock?

Economically, ABC and Larry own the same shares of stock. Each party will receive dividends and price appreciation/depreciation. ABC, however, has transferred their voting rights to Larry.

Adios also wrote:
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Not as disadvantageous as one might think since the stock goes X-Div reducing the price by the dividend amount more or less.....

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How does a stock go X-Div?

When you buy a dividend paying stock, you are paying for the "accrued" dividend. If you were to buy a stock with a quarterly dividend of $1 the day before the ex-dividend date, you would expect the stock price to fall by $1 the next day when the stock trades ex-dividend (all else being equal.)

Player24 wrote:
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The brokerage house probably does not own the shares in the first place. They are probably held by an investor who has an account at the brokerage house.

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If investor Omar Oblivious actually owns the stock that was lent to me (when I shorted) and purchased by Larry Long then does Omar lose his voting rights? Didn't we establish above that the lender loses their voting rights?

I am murky on this issue. Sorry. If Omar agreed to lend out his shares and he is paid rent, he is being compensated. But if the broker lends Omar's shares, I'm not sure how the broker explains to Omar that he has no voting rights (not that voting rights have any value in 99.99999% of the cases). I'll look into this for you, if no one else here has the answer.

Player24 wrote:
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ABC would lend the shares to you. That does not mean that ABC no longer owns the shares - they do.

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This contradicts the first post of Adios... Who is right?

I believe I am right, but Adios is usually right - so I'll wait until he weights in on the question.

Player24 wrote:
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They have simply lent the shares. By doing so, ABC gets "rental income" on their shares...and they sacrifice the right to vote on shareholder matters.

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What is this "rental income" that you speak of?

Repo rate, which varies according to the scarcity of the security. Stocks with high short interest have higher repo rates. The owner gets paid a small running fee for lending his shares.

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When it domes time for a dividend payment - Company will pay dividend on 1000 shares and you will pay dividend on 1000 shares. [ QUOTE ]

So, in essence I have created 1000 shares of XYZ corp x-voting rights?

Yes, that is correct. The dividend pool will consist of the money paid by the company and the money paid by short sellers - and all of this money is distribued to the owners of the stock (regardless of whether they bot their stock from short sellers or from someone who was previously long).

Thanks again for all of your help

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No problem. Good luck.

[adios]

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From my understanding this is incorrect (although it is quite possible that it is my understanding that is incorrect.) Isn't this precicely what happens when a stock is shorted? I short 1000 shares of XYZ corp meaning that I have -1000 shares of XYZ in my portfolio. This is balanced out by someone else having +1000 shares that don't actually exist.

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The shares do exist. Where did you get the idea that they don't exist?

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Larry also has the stock certificate for 1000 shares then aren't there 2 sets of the same 1000 shares of XYZ that are balanced out by my holding -1000 shares?

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No, Larry won't have a stock certificate in the scenario you describe. In this scenario Larry has agreed to take the delivery in his account in what's called street name if memory serves. Typicall Larry would agree to this when he opens his account. Larry doesn't get the stock certificate, it's just noted that he owns it in his account at the brokerage. I'm not going to get into the rest of your post because you've got things way wrong so far. You're making it much too complicated.

Q owns 100 shares of XYZ

R wants to short 100 shares of XYZ

Q agrees to lend the shares to R to short.

Q still owns the shares and all the rights that go with it.


Now with brokerage ABC involved.

Q buys 100 shares of XYZ through brokerage ABC.

ABC fills the order and notes this in Q's account and Q does not receive a stock certificate.

R wants to short 100 shares with ABC as his broker. Since Q has agreed to keep his 100 shares in street name, he has agreed to let ABC loan his shares to short sellers more or less. The brokerage ABCs job is to account for the shares in street name of XYZ as to who's short and who's long. ABC can't short more shares than it has in street name. If ABC doesn't have enough shares of a security that R wants to short (it does happen) R won't be able to fill his order entirely with ABC or perhaps not at all.


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How does a stock go X-Div?

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The company paying the dividend declares the date that it will pay the dividend more or less.

[AceHigh]

It depends how short, short is. If shorts sellers are looking at time frames longer than a quarter than stocks with a decent dividend can really cut into any potential profit and signifigantly raise the risk of shorting the stock.