How much daily or monthly interest do we pay for a 'Selling short' in stock marketing?

Question

What?

How do you receive interest while you short?

Answer 1

You don't pay interest when short, you receive interest.

Answer 2

Maybe the easiest way to explain it is with an example. Assume a brokerage has 3 customers, Larry, Curly and Moe.

Larry owns $10,000 worth of XYZ stock and has $1,000 in cash.

Curly has $8,000 cash in his account.

Moe has $15,000 cash in his account.

Between the three accounts, the brokerage has $10,000 worth of XYZ stock and interest bearing accounts totalling $24,000.

Now assume Moe decides to short $6,000 worth of XYZ stock which Curly buys.

The contents of Larry's account did not change.

Curly now has $6,000 worth of XYZ stock and $2,000 in cash in his account.

Moe now has -$6,000 worth of XYZ stock and $21,000 in cash.

Between the three accounts, the brokerage still has a net total of $10,000 worth of XYZ stock and interest bearing accounts totalling $24,000. However, since $6,000 in cash was transfered from Curly's account to Moe's, Moe should now be receiving the interest on the $6,000 that Curly used to receive.

In practice, brokerages treat different accounts differently. Most brokerages will not pay interest on the cash received from a short sale to the customer unless the customer has a large account. Instead, they put the cash into a "short" account that does not pay interest.

The amount in the short account is then adjusted daily to reflect the price of the stock. So, if you sold stock short for $6,000 and the value of the stock went up to $9,000, an additional $3,000 would be transfered from your interest bearing cash account to your short account that does not get paid interest. The only time you would pay interest is if the value of the stock went up enough that you did not have enough cash to put into the short account to match the value of the stock. In that case your broker would use the margin available in your account to borrow money to put into the short account. You would pay interest on the amount borrowed.

That is my experience from brokerages I have used. I would assume some other brokerages do things differently.

You need to check with your brokerage to find out exactly how they will treat the cash proceeds from a short sale in your account.