"Short Selling Opportunities"

 

WHAT IS SHORT SELLING?

Short selling is the ability to profit from a stock as its share price declines.

A short position is opened by selling a stock in the first instance with a view of buying the stock back at a latter date at a lower price. The difference between the selling price and the lower buying price is the profit.

 

Advantages of Short Selling Stock

  • As only a percentage of the exposure is required to be paid as security, the leverage achieved can be a distinct advantage.
  • The ability to make money in a stock that is in a downtrend.

 

How To Get Started

  • Open an Equities account with Hallifax Investment Services.
  • Read the short selling agreement and endorse the paperwork.
  • When shorting a stock indicate to your advisor that the trade is opening a short position.
  • Ensure that a minimum of 20% of the exposure value is deposited into your short account. Ideally a buffer of an additional 10% is recommended.
  • Meet the daily negative mark to market margin variation to maintain the exposure.
  • Check daily on any market news that may have been reported on the stock that may affect your obligations.
  • Finally, run through a hypothetical example of a short trade with your advisor so all aspects of the trade are fully understood.

 

Margining Mechanics of a Short Sale

Example:

8/02/01
Sell $ 20 000.00 ECP @ $1.208 (Market On Close)
Number of shares sold:   16556

Day 1 Margining Process:

Close Price For the 08/02/01 was $1.208

 

$ 10 000.00

Account Equity

$ (4000.00)

20 % initial margin

$ 0.00

Variation Margin Based on the Closing Price

$ 6000.00

Account Balance

Day 2 Margining Process:

Close Price for the 09/02/01 was $1.17

$ 10 000.00

Account Equity

$ (4000.00)

20% Initial Margin

$ 629.13

Variation Margin

$ 6629.13

Account Balance

Day 3 Margining Process:

Close Price for the 12/02/01 was $1.16

$ 10 000.00

Account Equity

$ (4000.00)

20% Initial Margin

$ 794.69

Variation Margin

$ 4 000.00

Return of Initial Margin As Position Was Closed Out

$ 10 794.69

Accounts Balance

This is an enhanced example illustrating the margining mechanics of short selling stock. It is not a recommendation to buy or sell ECP. The example was compiled on the 19/02/01 and does not include commissions.

 

Important Points

 

  • It is vitally important to place a stop loss order with your broker when short selling as the leverage involved is a "double edged sword".
  • Be aware of any dividends or rights issues that may be due on the stock as the seller is responsible to provide the stock lender these benefits.