Wednesday, March 10, 2010

Short Interest Ratio (Days to cover)

What is the short interest ratio?

We already talked about short interest, expressed as either the net number of shares sold short that are still outstanding (i.e. they have not yet been covered) or as a percentage of the company's float.

Short Interest

What is short interest?

The number of shares of a certain company that have been sold short and that are still outstanding (i.e. they haven't been covered yet). This can be expressed as the total number of shares sold short or as a percentage of the float (the float is the number of shares that are available to be traded by the public).

Tuesday, March 9, 2010

Short Squeeze

What is a short squeeze?

As we have seen, you can borrow shares that you don't have so that you can sell in the market and open a short position. While you have the short position open, you owe those shares to the entity that you borrowed them from (usually some sort of pension or mutual fund that does securities lending). Assuming there is no forced buy-in, you close out the position by eventually (when you decide) buying back to cover, thereby returning the shares to the original lender, netting you either a profit (if the shares declined) or a loss (if the shares rose).

Monday, March 8, 2010

Dividends on shares sold short

What happens to dividends and special distributions when a short position is open?

While a short position is open, there might be a scheduled dividend payment by the corporation to its shareholders or a special distribution of any kind (cash, stock, spin-offs, etc.). In this case, there are three participants, the original shareholder (who lent you their shares), the short seller (you), and the new shareholder (whoever bought the shares you sold short).

Voting rights on shares sold short

What happens to voting rights for shares that are sold short?

Normally, the shareholder lending out the shares will give up its voting rights to those shares while they are out on loan. This is done so that the voting power is not artificially increased just because there are shares that are borrowed to be sold short. The new shareholder (the one who bought the shares sold short) will have all the voting rights that said shares entitles him/her to. If the original shareholder needs to exercise their voting rights then they would have to call back their shares and finalize the loan so they can use those shares to exercise their voting rights. This is different than dividend rights since those usually go to both the original shareholder even while their shares are out on loan and also to the new shareholder (the one that just bought the shares that were sold short).

Capital gains on short positions

Is a profitable short position considered a capital gain?

Just like a long position any profits or losses you make (after you have closed out the position) are considered capital gains or losses and taxable as such. Furthermore, if you are in the US, short selling profits are always considered short term capital gains and taxed as such. Canada does not make this distinction between short and long term capital gains.

Uptick rule for short selling

What is the uptick rule?

In the past, you couldn't sell short when there was a down tick (i.e. the stock's last move in price was down in price). This was to prevent stocks that were already going down from going down even further because of short sellers. Starting in 2007 this rule was eliminated, although it might be reinstated either fully or in a modified version.