Borrow rate
Also known as: cost to borrow
The borrow rate is the fee a pays to borrow shares before selling them short. It is quoted as an annualized percentage of the value of the shares borrowed, and it accrues for as long as the short position stays open, so a effectively rents the shares for the life of the trade. The rate is set by supply and demand for the specific 's shares among lenders, typically institutions and holding large share positions.
Borrow rates for most widely held, heavily traded stay low, often a small fraction of a percent annualized, because plenty of shares are available to lend. that are , meaning few shares are available relative to the demand from , can carry borrow rates of many percentage points a year, and in extreme cases well over one hundred percent annualized during a heavily shorted, high demand situation. That cost eats directly into a 's potential profit and needs to be weighed against the expected move in the .
Borrow rates change over time as available supply and demand shift, so a short position that started cheap to hold can become expensive later if the becomes harder to borrow. Traders considering a short sale check the current borrow rate before entering the position, since a high or rapidly rising rate can turn an otherwise sound into a losing trade purely on carrying cost.