Borrow Fees and Stock Loan Costs

To sell a stock short, you must first borrow it, and borrowing is not free. The borrow fee is an annual interest rate charged on the value of the shares you borrow, accrued daily for as long as your short position is open. For most large companies the fee is tiny. For heavily shorted or scarce stocks, it can be large enough to turn a correct bearish call into a losing trade.

How borrow fees work#

Daily borrow cost = Value of shorted shares × Annual borrow rate ÷ 360

Brokers commonly use a 360 day year for this calculation, though conventions vary. The rate can change daily as supply and demand for the shares change, and the value of the position changes with the share price.

Easy to borrow and hard to borrow#

Brokers label stocks as easy to borrow (ETB) or hard to borrow (HTB). For HTB stocks, you may need to request a locate before shorting, and availability can disappear without warning.

Where the shares come from#

Brokers lend shares held in margin accounts and borrow from institutional lenders such as pension funds, index funds and custodian banks, who earn income from lending. See Securities Lending and Stock Loan. When many traders want to short a stock and few holders lend it, rates rise.

Other costs of being short#

• Dividends: if the company pays a dividend while you are short, you owe that amount to the lender. A stock with a 4% dividend effectively costs a short seller 4% a year in addition to borrow fees.
• Recall risk: the lender can recall the shares, and if your broker cannot find replacements, you may be bought in, forced to cover at the market price, often at a bad time.
• Margin interest and collateral: shorting requires a margin account, and losses increase margin requirements. See Margin.
• Short squeezes: when hard to borrow stocks rise, forced covering can accelerate the move. See Short Selling.

Borrow rates as a signal#

High and rising borrow rates show strong demand to short a stock. Traders watch them, along with short interest and days to cover, as signs of crowded bearish positioning and potential squeeze risk. They do not predict direction on their own: some heavily shorted companies keep falling, others squeeze sharply.

Alternatives when borrowing is expensive#

Frequently asked questions#

How much does it cost to short a stock?#

For most large, liquid stocks, a fraction of a percent per year in borrow fees. For hard to borrow stocks, it can be tens of percent or more per year, plus any dividends paid.

Why did my borrow fee change?#

Borrow rates change with supply and demand for the shares. More short sellers or fewer lenders push the rate up.

What happens if my shorted shares are recalled?#

Your broker will try to find shares elsewhere. If it cannot, it may buy in your position, closing your short at the market price.

Sources#

• U.S. Securities and Exchange Commission, Short sale
• Wikipedia, Securities lending