What are the costs of short selling and how does the rebate rate work?

Short selling involves borrowing shares from a broker (or another investor through the broker) and selling them in the market, hoping to buy them back cheaper. But holding a short position has real costs.

The Mechanics:

1. You borrow 500 shares of Ashford Biotech at $60 and sell them, receiving $30,000 in cash
2. That cash goes into a margin account as collateral — you cannot withdraw it
3. The broker lends those shares to you and charges a stock lending fee (also called a borrow fee)

Cost of Carry Components:

Rebate Rate Explained:

When you sell shares short, the cash proceeds sit in a margin account as collateral. The broker earns interest on this cash (say, the federal funds rate of 4.5%). The broker keeps a portion and passes the rest back to you as the rebate.

• Federal funds rate: 4.50%
• Broker retains: 0.80%
• Your rebate rate: 3.70%

For hard-to-borrow stocks, the rebate can be zero or even negative — meaning you pay the broker for the privilege of borrowing scarce shares.

Total Cost Example for Ashford Biotech:

• Position: short 500 shares at $60 = $30,000
• Lending fee: 1.5% x $30,000 = $450/year
• Dividend owed: 500 x $1.20 = $600/year
• Rebate received: 3.70% x $30,000 = -$1,110/year (this offsets costs)
• Net annual cost of carry = $450 + $600 - $1,110 = -$60 (net benefit)

In this case the rebate exceeds costs, so the short earns a small carry. But for hard-to-borrow names, lending fees can be 10-20% annualized, overwhelming any rebate.

Key exam points:

• Short sellers owe dividends declared during the borrow period
• The rebate rate is not guaranteed and fluctuates with market interest rates
• Hard-to-borrow fees can make short positions unprofitable even if the thesis is correct
• On the CFA exam, watch for questions where the net cost of carry changes the breakeven price

Dive deeper with our CFA Level I equity investment modules.