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