If you decide to open a short position on Barclays. The market price is 126.85/126.95. You go short on 10,000 shares at 126.85p, the bid price.
As a Trader Account holder you supply a deposit of 5% or £634.25 to open the trade. The commission on the trade is 0.10% or £12.68 (10,000 shares x 126.85 x 0.10%). There is no stamp duty to pay.*
The market price rises throughout the day, but you believe it will fall tomorrow. You decide to hold your position overnight. At the end of the day, your account is adjusted to reflect interest and dividends.
Interest adjustments
Interest adjustments on short positions are calculated daily in relation to the latest one-month interbank offered rate of the currency in which you are dealing. They also incur a financing fee.
Unlike long positions, interest adjustments on a short position can appear on your account as either a debit or a credit, because the financing fee is subtracted from, rather than added to, the interbank offered rate when calculating the adjustment.
Therefore, if you have a position on a sterling denominated share, and the London Interbank Offered Rate (LIBOR) is greater than your financing fee, the adjustment appears on your account as a credit; conversely, if LIBOR is less than your financing fee, the adjustment appears on your account as a debit.
On 1 April 2009, LIBOR is at 1.0112%, which, assuming a financing fee of 2.5%, means that the adjustment will appear as a debit:
| LIBOR: |
1.0112% |
| Fee: |
- 2.5% |
| Total: |
-1.4888% |
The closing offer price on 1 April 2009 is 127.45p, which gives your position a closing value of £12745. The annual interest adjustment on this value would be £189.74, which creates a daily debit of 51p (£12745 x -1.4888% / 365).
Dividend adjustments
When you hold a short position and the share goes ex-dividend, the dividend value is debited from your account. In this example there was no dividend, but if there had been, and the amount of the net dividend was 7p per share, £700 would have been debited from your account (10,000 shares x 7p = £700). Overall, you do not lose in this situation as the market price of the share will also fall when dividends are paid out.
Closing the position
Your prediction is correct and by mid-day on April 2 2009, the market price for Vodafone is 124.85/125.95, and you believe it will not fall any further. You decide to take your profit and close the position before it rises. You buy 10,000 shares at 125.95p, the offer price. The commission on this transaction is 0.10% or £12.59 (10,000 shares x 125.95p x 0.10%).
Your profit on the trade is calculated as follows: |
