YouTube video by Adrian Reid (Enlightened Stock Trading) explaining the three primary costs of shorting stocks: brokerage/commissions, the stock borrow fee (a time-proportional interest-like fee charged by brokers to borrow shares), and paying dividends to the original shareholder when a short position spans a dividend. The video describes how borrow fees vary with liquidity and availability (example: Apple shown at 0.25% annual fee; GameStop shown at 8.94% annual fee), shows per-day cost calculations for a $20,000 short position, warns that borrow rates can exceed 100% for hard-to-borrow stocks, and recommends trading liquid stocks and actively managing dividend dates to protect profitability.
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So you've probably heard about shorting stocks and you're probably thinking it's great strategy, but you might be wondering what are the costs of shorting a stock? Right. I'm glad you asked. My name is Adrian Reed, this is Enlightened Stock Trading. And in this short video I want to talk to you about the three major costs of shorting a stock. But before we go any further, make sure you hit the subscribe button and give this video a thumbs up so that you get notified of all of my future videos because I've got new trading content coming out all the time and I don't want you to miss a thing. So what are the three costs of shorting a stock? Well, the first one is brokerage or commission, the second one is the stock borrow rate and the third one is dividends. Let's talk about each of those in turn. Firstly, commissions, commissions are exactly the same as when you're trading on the long side, you've got to pay your broker to place the trade for you. Now sometimes you can get commission free arrangements depending on what market you're in and what broker you use. But if you, if you don't have commission free trading, then you will have to pay brokerage to place your trades. It's exactly the same as alongside. So I'm not going to go into any more detail on that. The second cost of shorting is the stock borrow fee. Now the stock borrow fee is the fee you pay the broker in order to borrow that stock for the duration of your trade. And the reason you have to do that is someone is lending you the shares and in order to, in exchange for lending you the shares, they expect to get some compensation, some income for that. It's a great way for fund managers, hedge funds and large shareholders to earn some extra income on long term holdings that they don't intend to sell. So they give their shares to the broker. The broker lends the shares to you and in exchange you pay a stock borrow fee. So what is the stock borrow fee? How much do you have to pay? Well, it depends totally on how easily shortable the stock is and how liquid the stock is and how many shares the broker has available. So the more difficult to borrow the stock, the higher the stock borrow fee is going to be. The easier to borrow the stock, the lower the stock borrow fee is going to be. On my screen here I've got the Stop Borrower fee tool for interactive brokers. And this is part of Trader Workstation. When you want to go short, you just open the stock borrow fee tool, and it'll tell you how many shares there are available to short and also what the fee rate is. So on the very top left of this screen, you can see that there's at least 274 million shares of Apple stock available to short right now. And the fee rate is 0.25%. This is a very easy to borrow stock. But what does the 0.25% actually mean? Well, this is like an interest rate per year. So if you short that stock and you held it for a year, you would have to pay 0.25% of your position to the original owner of the stock in exchange for borrowing it. But if you only hold it for one day, then you will pay 0.25% divided by 365 for the per day rate for your stock borrow fee. So this is only is proportional to how long you hold the stock for. And generally for highly liquid stocks, it's not a very high number, but for low liquidity stocks, it really can be a high number. Let's have a look at another stock. Apple is 0.25. Let's look at GME GameStop. This is one we've talked about in a previous video. There was a big short squeeze in GameStop a little while ago, and you can see that there's 706 shares available to short in 706,000 shares available to short for GameStop. So still quite a few, but nowhere near as many as Apple. And the fee rate is 8.94%. So that means if you short this stock and you held it for a whole year, you would have to pay the original owner through your broker 8.94%. So if you do the calculation on that, let's just get my calculator here. Let's say you're going to have a $20,000 position. We multiply that by 8.94 and then we divide it by 100 for percentage. And then so that is $1,788 per year that you would have to hold it. Pay to hold it. We divide that by 365 and it's $4.89 per day. So to short $20,000 of GME today at the current fee rate, then it was going to cost you $4.90 near enough per day to hold that $20,000 position. Whereas in Apple it costs you almost nothing. I mean, not quite nothing, but it's very, very little in comparison. So the fee rate is a cost which you really do have to take into Consideration, the fee rate can get very, very high for low liquidity, hard to borrow stocks. I've seen fee rates as high as 100% or more for low liquidity stocks. So before you go rapidly shorting anything in the market, check out the fee rate and make sure that it's not so high that that it will kill the profitability of your trading system. So that is the stock borrow fee. The third cost of shorting is dividends. Now, the reason you can borrow stock is that fund managers, hedge funds, large shareholders, hold these big blocks of stock that they have no intention of selling, but in order to earn extra income, they'll loan them to you through the broker and take a feedback fee for that. As we just discussed, the stock borrow fee. But because they don't intend to sell that stock, they actually have that as part of their portfolio. They also don't want to miss out on the dividends that the stock declares. So if you're short a stock, you've borrowed it from your broker, you've sold it short, and a dividend is declared and paid, the owner of those shares is going to expect you to pay them the dividend that they're missing out on because you've borrowed and sold the stock share short. So one way to mitigate this is if a stock is a dividend paying stock when it's coming up to its dividend date, you can close your short position, wait till the dividend is paid, and then open your short position again if it's still valid.
That way you don't have to pay the dividend because you weren't actually short the stock when the dividend was paid. So you don't have to pay. Like you can avoid it, but you've got to actively manage that. So you want to be careful. So the three costs for shorting a stock are the brokerage or commission, the stock borrow fee and dividends. If you want to make the most out of your short side trading, you want to take all of those into account. When you're designing your trading strategy. The stock borrow fee is probably the most significant because it can be really high. That's why I trade mostly very large liquid stocks on the short side because the stock borrow fees tend to be smaller. If you've got a very high paying dividend stock, you want to be careful. You don't want to end up having to put your hands in your pocket to pay the dividend because that could also kill the profitability of your system if it's a short term system. So those are the three costs for shorting a stock. Hope you found this video helpful. If you did, give it a thumbs up and keep watching my video series on shorting a stock if you're reading it on my blog. Continue reading and let me know if you've got any questions in the comments below. Hope to see you in the next video. Bye for now. It.
