Can you use cash from shorting stocks to buy stocks

Discussion in 'Trading' started by Maverick2608, Aug 8, 2022.

  1. You have USD 1.000.000. You short sell stocks for USD 1.000.000. You buy other stocks for USD 2.000.000.

    Do you need to borrow USD 1.000.000 and pay interest or can you use the USD 1.000.000 proceeds from the stocks sold short?

    For instance at IB.
     
  2. Robert Morse

    Robert Morse Sponsor

    No. Long stock, long calls and short calls go into the type 2 Margin account while Short positions go into the Type 3 Short account. They do not offset and the money in the Type 3 account does not belong to you. It was from the sale of stock you did not own.
     
    M.W. and Maverick2608 like this.
  3. It works just the opposite. IB will need you to put up more cash than the value of your short position. Margin requirements are based on many factors and they will not reveal their exact formula but for each $1,000 you go short you will find your buying power can drop by multiples of that.
     
  4. schizo

    schizo

    I never understood that rationale. If that's so, why are you responsible for paying the dividend?
     
  5. Robert Morse

    Robert Morse Sponsor

    If I'm short 100 Shares of AAPL and it goes XDIV, my clearing broker borrows that stock from someone that is long. They are entitled to get that dividend as they still own that stock and you borrowed it to make delivery to the buy stock you did not have. The short needs to make good on the dividend.

     
  6. schizo

    schizo

    Thanks, but that's something I'm already aware of. My question was more about why they refuse to credit my short position by segregating it in Type3 account while forcing me to pay the dividend. This is like telling a person who gets a bank loan not to use that same money to pay off the interest. Once the loan is made, shouldn't he be able to do whatever he wants with that money?
     
  7. Robert Morse

    Robert Morse Sponsor

    The CASH in the Type 2 Margin account is your money. The CASH in the Type 3 short account is not your money. It is collateral for the lent shares.
     
    SunTrader likes this.
  8. rbigsby

    rbigsby

    So what good is shorting a stock do then? You can't use the money you get from selling it short.
     
  9. IMO you are right, the rules are wrong / unjust.
    Then the interesting question arises: where else is it possible to do?... I think there are still plenty of possibilities. One needs to, somehow, "loop" that back to trading capital... :)
    A task for "creative bookkeepers"... :D

    Imagine you have your own shop of goods: you can immediately re-invest the money you cash-in. Not so in trading, b/c of the damn T+1 and T+2 settlement rules...
     
    Last edited: Aug 9, 2022
  10. Snuskpelle

    Snuskpelle

    Because risk I assume. This would effectively allow people to lever up a lot higher that way, or even recursively - enabling them to short more shares with the (hypthetical, since it is what we are discussing) credit received from shorting shares. Not a recipe for financial stability where stock lenders are certain to get their shares back.
     
    #10     Aug 9, 2022