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On January 1, you sold short two round lots (that is, 200 shares) of Four Sisters...

On January 1, you sold short two round lots (that is, 200 shares) of Four Sisters stock at $58 per share. On March 1, a dividend of $1.50 per share was paid. On April 1, you covered the short sale by buying the stock at a price of $60 per share. You paid 50 cents per share in commissions for each transaction.

  

What is the value of your account on April 1?
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Answer #1

If the company pays dividends, that dividends belong to the original share holder. So, the short seller has to pay dividends.

Beginning value = 200 * 58 = $11,600

Amount to buy back shares = 200 * 60 = $12,000

Dividends to pay = 200 * 1.5 = $300

We pay commissions twice, once when we buy and once when we sell

Total commissions = 200 * 0.5 * 2 = $200

Ending value = Beginning value - Amount paid to buyback shares - Dividends - Total commissions

Ending value = 11,600 - 12,000  - 300 - 200

Ending value = -$900

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