On Credit Cash Sale

In this case, it is also a cash operation in which the vendor receives as a loan time securities. The on credit vendor sells the securities that he doesn’t have because he thinks that in the future he will be able to purchase them cheaper.

Security lenders are usually investors that maintain stable security portfolios during several years and that seek to increase their profitability through the interest that they perceive in change of a temporary loan of their securities.

Security borrowers are usually investors that are convince that the quotation of these securities will fall during loan period.

The mechanics of an on credit cash sale is the following:

  • the vendor communicates to the agent an on credit cash sale
  • the agent supplies the necessary securities after the vendor deposits the initial guarantee and delivers an irrevocable purchase order without any date.

The sum of the sale is deposited with the agent as a guarantee, but in the name of the vendor. Usually, the vendor will pay for the rent of the securities and will also receive the profits product of the sale.

If the quotations rise more than a determined percentage that is regulated by the actual legislation, the vendor is obliged to reconstitute the guarantees at the demanded level. If not, the agent officially buys in base to the irrevocable purchase order, and proceeds to the liquidation of the operation.

At the end of the agreed period, or when the on credit vendor thinks that he has reached the hoped quotation, he orders the purchase to cancel the credit of the securities. The market then gives back the guarantee that was deposited.

If securities have fallen in their quotation, the on credit vendor keeps the difference. On the contrary, if securities would have risen in their quotation, he would have had losses. The on credit vendor can also cancel the operation by returning securities from its own portfolio.

If societies whose securities have been object of an on credit operation distribute dividends or increase their capital, they will proceed as follows:

the ion credit purchaser will receive the dividends and the corresponding rights to capital increase.

The on credit vendor must pay the dividends and deliver the rights of subscription that correspond to whom lent the securities. This last circumstance will oblige the on credit vendor to acquire the rights on the market, if he does not already have them in its own portfolio.

It is good to remember that not always is there an authorization to do this kind of on credit operations are usually temporarily forbidden after an important stock exchange crack has taken place, with the end of limiting the practices that promote speculation.