Thread: Shorting and Dividends

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  1. #1

    Default Shorting and Dividends

    I just recently started shorting and noticed I have to pay out a dividend.

    I've read numerous websites documenting that this is how it works but frankly I'm at a loss of words (and some $$$).

    I'm borrowing the stock from someone. So really, the person I borrow from should get paid the dividend from the company.

    Instead, they get paid by the company.. and then I pay some fictional person???

    Does anyone know why this is the way it is? It almost seems like the whole process got mucked up somewhere and everyone's been going with it over the years and (2) dividends are getting paid out when only (1) dividend should.
  2. #2


    The idea is that, since you borrowed someone's stock, YOU are getting paid the dividend, so you must therefore pass that dividend on to the rightful owner (the person you borrowed from). Dividends are not being paid out twice.

    Another way to look at it:

    When you BUY a stock and a dividend is paid, you get the dividend but your share price is adjusted down by the amount of the dividend. So it's a wash, overall.

    On the other hand, when you SHORT a stock and a dividend is paid, the share price is still adjusted down by the amount of the dividend. If you didn't have to PAY that dividend, you would have a GAIN by virtue of the share price adjustment alone. This would mean you could simply short a stock right before the ex-date and make a gain on the share price adjustment, which would equate to a free lunch. There are no free lunches in the stock market, so you pay the dividend, and the event ends up being a wash overall, just like when you buy.
  3. #3


    LongArm explains what happens on the ex-dividend date great. But to add to that, think about a company with 100 shares outstanding. Let's say you borrow 1 from your broker to short sell it to someone else. There are now 101 shares outstanding. The original owner of the share is the legit owner, and the person who bought the 1 share you sold is technically still a shareholder entitled to the dividend. But because the company only has 100 shares outstanding, they pay the dividend on 100 shares, and since you borrowed a share to short sell, you pay the extra dividend.
  4. #4


    Usually it is not a good idea to short stocks that pay dividend such as AT&T. There are better stocks out there that you can short.
  5. #5


    There is no problem with shorting a stock that pays a dividend. Just have it covered in time to avoid the charge.

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