If I sell a stock short, how do dividends, etc. impact me or my returns?
Answers
951 points
Grudun answered 11 months ago …
If you sell a stock short you have to pay out any dividends that are declared and hit the ex date while the transaction is active(before you have covered the short).
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952 points
rvilmur answered 11 months ago …
You are responsible for paying the dividend if you are short on the ex-dividend date. Technically the price of the stock should fall by the dividend amount making it a wash in short term effect. Stocks do seem to recover and rise back up in anticipation of the next dividend. Your broker will deduct the dividend money from your account.
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339 points
Sensei answered 11 months ago …
The problem with your question is that you haven't said how you measure "returns".
When you buy a stock you receive any dividends paid. If there were no such thing as "short selling", all those dividends would be paid by the company. Since "short selling" does exist though what has happened is that the short seller has "borrowed" the stock from someone who actually owns it (let's not get into "naked shorting" for the purposes of this discussion.)
From that, if you think about it, it is clear that there are actually more shares "owned" than actually exist. Since every owner is entitled to the dividend and since there are more shares "owned" than actually exist, it means that more money is being "paid" in dividends than the company actually wrote cheques for. (I'm Canadian ... we call them "cheques", not "checks".) Who pays the difference? You - the short-seller!
So, if you short a stock you have to pay the "buyer". How does that impact your return?
Suppose you buy a stock for $10 that pays a 3% dividend and sell it at the end of the year (plus a day) for $ 9.70. What is your return? It depends on how you define "return" ...
If you define "return" on a cash basis, you could say that you received proceeds of sale of $ 9.70 plus $ 0.30 in dividends for a total of $ 10 so your "return" was zero.
If you look at it on a capital gain / loss basis, you could say that you received proceeds of $ 9.70 against a cost of $ 10, so you lost 3%.
If you look at it on a tax basis, you could say that you have a 30 cent "long-term" capital loss (we don't have such things in Canada), half of which is deductible, against 30 cents in dividends, all of which is taxable giving you a 1.5% net loss (times your tax rate.)
And if you held the stock for one year less a day, you'd have a "short-term" capital loss (again, we don't have such a concept in Canada) giving you a different result.
So, you see it depends on what you define as "return". I've given you three different perspectives. I hope this helps.
