Since You AskedQ&A
Since You AskedConfused about some aspect of trading? Professional trader Don Bright of Bright Trading (www.stocktrading.com), an equity trading corporation, answers a few of your questions. To submit a question, post it on the Stocks & Commodities website Message-Boards. Answers will be posted there, and selected questions will appear in future issues of S&C.
SHORT SELLING REVISITED
You have written previously about the idea of selling stocks short. I think I understand the concept of profiting when a stock’s price goes down, but I still am unclear on some things. Perhaps you can help me. I remember from years ago something about an uptick rule. A friend told me recently that we don’t need to worry about that rule any longer. To be honest, I’m not even sure what that term means; is it something I need not worry about these days?
Another question is about stocks that cannot be shorted because they are “hard to borrow.” What does this mean? Is this something that would affect my desire to sell stocks short to make money on the downside? I think the market is way too high and will likely go down soon. — Jlong, Denver, CO
Okay, my friend, first off I have to respond to your last comment about the market being too high. The Street is paved with ex-traders who thought the market was too high about 3,000 Dow points ago! Be careful with your directional trading. Picking direction (stubbornly, especially) is how we lose new people from time to time. You might check Tesla Motors (TSLA) as an example of a “short squeeze” (look back at a May 2013 chart of TSLA).
Regarding your questions about short selling and the details of how it all works: Traders tend to think of buying and selling simply as entry and exit points. Sometimes we buy first, then sell. Sometimes we sell (short) first, then buy back. It doesn’t make much difference to us, since stocks tend to go up and down each day, week, month, and so on. If I buy something at $30.40 and sell it at $30.90, I make 50 cents on, say, 1,000 shares, or $500. If I sell (short) something at $30.90 and buy it back at $30.40, I again make the same $500. That part is pretty straightforward.
However, you are wise to ask about the details of selling stocks short. It is very important to know and follow the rules involved. If you do not own any shares of XYZ stock, and you think its price will go down soon, you must offer to sell the stock as sell short (SS on our system) versus sell long (SL on our system). This designation tells the broker (or clearing firm) that they are responsible for delivering those shares within a three-day period (it’s called a three-day settlement). For most major symbols (S&P 500, Dow 30, and so on) your broker will likely have those shares to deliver in the proper time frame. This is pretty much transparent to you. And as long as you have marked the order short, you are doing it correctly.
If you attempt to sell short and are not allowed to, that is, perhaps you received a “security is hard to borrow” error message or something similar, you may need to contact your broker or clearing firm. The broker or clearing firm is responsible for delivery of those shorted shares, and if they don’t have adequate shares in their inventory, they may need to actually go out (electronically) to borrow shares. These shares may be borrowed from such places as the Harvard Endowment, CALPERS, or any big organization that holds shares in the specific symbol you’re requesting. They generally charge something for loaning out these shares for the time period until purchased back. You can request to borrow these shares, and if your broker (clearing firm) says you are “good,” then you can follow their procedures on how to properly execute the order.
It seems like a hassle, but it’s well worth it, since the stocks “can’t go up forever” — or can they?
QUALIFIED OR NONQUALIFIED DIVIDENDS?
I have invested in a couple of REITs, primarily because of their dividend yields. My accountant has asked me if these dividends are qualified or nonqualified. I have no idea what that means. How can I find out about this?
Well, I have to admit that I had to do some checking myself in order to respond to your question, since in my firm, all the dividends are treated as ordinary income. But as a retail investor, you do need to know this information. I found an online service at www.dividend.com where you can simply type in the symbol (I used NLY as an example), and it appears to come up with a nicely formed result (Figure 1). This should help you and your accountant.
FIGURE 1. Source: www.dividend.com