Paying Dividends On Your Short PlaysYou receive the obligation of paying dividends when you short a stock. This seems worse then it actually is. There is still plenty of money to be made in the market on the short side.For all those who didnt know that you have to pay dividends when shorting now you know. But lets look at why that is first. When you short a stock you are borrowing the stock from your broker who plans on keeping it as a long term play then you sell it to another investor on the open market. The investor now owns the stock, but you owe the stock rights to your broker. This includes the dividends. When a company pays the dividends you are responsible for making sure your broker gets the dividends, that means you are the one paying dividends. Now I know many people are thinking, why would anyone want to take a position that will give them a negative cash flow? Well in certain times it not only makes sense, it is the smartest thing to do. This year the SPY has gone from $150 to $75 in a year, the whopping $2.77 you would have got in dividends during that time would have done little to offset the loss. Likewise for a short seller paying dividends of $2.77 would have not been so bad. Another thing you should remember, dividends are not extra money, they come out of the stock price. If your stock is trading at $50 and you get a dividend of $1 your stock is now trading at $49. If you are long it is like you are taking money out of your savings every month, instead of receiving extra income. If you are short the change in price will often compensate the dividends you will have to pay as a short seller. So do you even need to worry about dividends when shorting stocks? That depends on the trader, I do. Just to be safe, I prefer to look at how long I plan on holding the short position and how much it will cost in dividends. I always factor in the amount of dividends I might have to pay into my risk reward ratio. For example say I am shorting stock XYZ. It is trading at $35 and I have a target of $28. If the stock gets to $37 I will cut my losses short. The stock will also be paying $.50 in dividends in the near future. On a trade like this my max profit would be $35-$28-$.50 or $6.5. My max loss would be $35-$37-$.50 or -$2.5. So I would be risking $2.5 to make $6.5. Because I like to take trades that offer at least a 2/1 risk reward ratio this trade would work for me. You may be different, or might not even have a target, in which case you should find out how you want to factor in the dividends to your trade, if at all.Have A Great Story About This Topic?Do you have a great story about this? Share it!
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