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Question:
Ian Lance, CFA, is discussing short selling with a client and states, "The short seller must pay any dividend to the lender of the stock. In addition, the short seller must provide collateral to the brokerage house." Has Lance stated the short seller's obligations accurately?
A
Both of these statements are accurate.
explanation
In a short sale transaction, the lender of stock would not receive dividends from the issuing company. Therefore, if the company paid a dividend, the short seller would be required to pay that amount to the lender. The short seller must post some collateral or margin (usually the proceeds of selling the stock).
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