Short Selling
A client uses this service when they anticipate a decline in the market value of a security. Stocks that an investor expects to decline are borrowed from a creditor, in this case Fio banka, which is then sold on the market.
If this expectation becomes reality and the price of the stock really drops, the investor purchases the same quantity of the stock at a lower price that it was first sold thereby stopping speculation on the drop (the stocks are returned).
The difference between the buy and sell price is the resulting profit or loss.
The client's funds are used as collateral for the borrowed securities (cash, securities or a combination of the two). From the creditor's point of view this is a loan provided in the amount of the current market value of the sold stock.
- Securities lending is known as a "short sale".
- A short sale can be concluded in part or in full at any time.
- The maximum size of a short position is limited by the credit line.
- The cost is the interest on the market value of the borrowed stocks at the end of the day.
- A short sale is inherently risky. When speculating on a decline in prices, the investor has limited potential for profit but there is no limit on any potential losses.
Short Sale in the Czech Republic
Speculate in the Czech Republic on the Prague Stock Exchange. To borrow the shares from this shortable list.
If an investor is looking to hold a short position for a number of days, it is necessary to check (with Fio banka dealing) to ensure there are sufficient securities that can be borrowed for the required period. This does not apply to intraday trading.
The period for which a short position is held is not limited but an investor can experience a situation where a short position must be completely or partially closed in the same day (e.g. in order to remove the stock from the list of securities available for margin trading). The client will be immediately informed as soon as the creditor becomes aware of such a situation. As a rule a short position must be closed 15 - 30 minutes before the close of the market.
Short Sale Costs
Short position costs are the interest on the volume of securities borrowed for margin trading pursuant to the selected loan rate. Interest is calculated from the balance at the end of the trading date the same as for a interest from margin trading, see here.
Short Sale in the USA
Thanks to a quality system there are thousands of titles without any quantity (or volume) limits available for short sale trading in the USA. Titles available for Short Sale are marked with the symbol S in e-Broker.
Similar requirements are placed on a short sale as those for margin trading. If a client already has purchased shares in his or her portfolio (a long position) then a short sale involving these titles is not allowed. The same applies if a client has a short sale position with a title and the return those securities borrowed for the short sale (close the short position) before the same titles can be added as a long position .
Short Sale Costs
The same as for margin trading in the USA, a client is charged a loan fee at the end of the month based on the daily market value of the his or her open positions (therefore the current market value of the borrowed securities). Currently the interest is 8.95% p.a. on such a loan and a quarterly loan origination fee of 0.47% of the total loan framework is also charged. If a client draws a loan for margin trading with various stocks and completes short sales with other stocks, the funds obtained from the short sale are used to pay a portion of the loan and the client's costs are not increased. Margin trading and short sales compensate each other up to the amount of the fees; the amount of the agreed loan cannot exceed the total of all the loan funds the client has drawn and all of the securities he or she has borrowed (compensation here does not occur).
How to start making short sales?
Fio banka a.s. offers short sale trading pursuant to a unified contract along with margin trading for the USA (until 01 September 2010, BaFio, a.s. offered these services in the Fio Financial Group). A special type of order placed electronically, over the phone or in person at a branch is used for short sales (to open a short position).
