Jonathan Raa | Nurphoto | Getty Images Trump Media is making a point of telling its shareholders how to prevent their stock from being loaned to short sellers — who bet the price of the shares will drop.
Former President Donald Trump is by far the biggest shareholder in Trump Media, owning nearly 60% of its stock.
But Trump, who is the presumptive Republican presidential nominee, and Trump Media since late March have seen billions of dollars in market value evaporate from share price declines.
A Trump Media spokeswoman told CNBC that the company ”believes it has a responsibility to provide factual information in response to the questions its shareholders are asking.”
Trump Media in its updated FAQ nodded to that risk in noting that brokerage firms loan shares “to sophisticated and institutional investors” to do short sales.
Trump Media also pointed out that lending shares to short sellers can earn brokerage firms “an alternative source of revenue.”
Only about 5 million shares of DJT have been available to short out of more than 136 million company shares.
And much of the 5 million shares were already locked up in short positions earlier this month.
Getty Images | Nurphoto | Jonathan Raa.
A key message from Trump Media to its investors is how to stop short sellers—those who wager that the price of the company’s stock will decline—from borrowing their shares.
The advice to avoid short selling was published on Trump Media’s website on Wednesday. This coincides with the company’s DJT stock experiencing a significant decline in value since going public on March 26. Additionally, despite the comparatively high costs associated with financing these trades, short sellers have shown a strong interest in the owner of the Truth Social app.
Trump Media’s stock price increased significantly on Wednesday, rising by more than 15%; however, even at its closing price of $26.40, it was still 63 percent below its opening price on March 26.
Just this past week, the stock fell by 20%, and on Monday and Tuesday, it fell by over 18% and 14%, respectively.
The closing price of the shares on April 1, the day Trump Media revealed it had booked a $58 million loss for 2023 despite only generating $4.1 million in revenue, was nearly 46% lower on Wednesday.
With almost 60% of the company’s shares, former President Donald Trump is by far the largest shareholder in Trump Media. And if DJT’s price stays above $17 per share in the upcoming days, his 78.75 million shares could soon increase by 36 million shares because of an earnout clause in the merger agreement that made the company public.
Nevertheless, since late March, share price declines have caused billions of dollars in market value to disappear for Trump, the presumed Republican nominee for president, and Trump Media.
Following two days of steep price declines, the company updated its website’s frequently asked questions list on Wednesday. The company provided more details in an 8-K filing it made with the Securities and Exchange Commission on Thursday morning.
The FAQ entry “How do I prevent my shares from being loaned for a short interest position?” that was first made on Wednesday has a lot more instructions added in the supplement.
Taking out a loan on stock in a company and promptly selling it for a predetermined price is known as short selling. After paying brokers’ fees, the short seller collects the difference between what they initially sold the shares for and the price they kept, hoping that the share price will drop over time and allow them to repurchase the same number of shares and return them to the lender.
Trump Media added a FAQ on Wednesday that stated, “For long-term shareholders who believe in the Company’s future, the Company is highlighting the following actions you can take with your brokerage firm to prevent the lending of your shares for short selling.”.
A few of the suggestions are to move Trump Media shares to the company’s designated transfer agent, hold DJT shares in a cash account at a brokerage firm rather than a margin account, “opt out of any securities lending program,” and move shares to a bank and “hold them in your retirement account.”. “.”.
A useful form letter for shareholders to send to their brokers is included in the instructions.
The letter reads, “It is my formal request that you ensure that the following securities are held solely in my cash account and are not available for use in any stock loan activities. “.
Before a section that the sender can fill out with the number of shares, the letter states, “I hereby expressly opt-out of any securities lending programs and instruct you to not loan out any of my shares.”.
The much more straightforward instructions that were first posted in the FAQ on Wednesday simply stated, “To prevent shares from being loaned for a short interest position, contact your brokerage to place restrictions on the lending of your shares to short sellers.” In contrast, the detailed instructions are much more complex. “.
In response to the inquiries from its shareholders, Trump Media “believes it has a responsibility to provide factual information,” a spokeswoman for the company told CNBC. “.
A “long position” in a stock, where a person’s maximum loss is equal to the price they paid to purchase the shares, is not the same as short selling, which makes it especially dangerous.
A short position in a stock, on the other hand, has the potential to see continuous price increases, which would require the short seller to pay an exponentially higher amount to buy back the shares and return them to the lender.
Since brokerage firms lend shares “to sophisticated and institutional investors” to engage in short sales, Trump Media acknowledged that risk in its updated FAQ. Customers who engage in short sales with brokers are frequently required to be seasoned investors with enough cash or collateral on hand to cover losses in the event that the short trade fails.
Trump Media also noted that brokerage firms can generate “an alternative source of revenue” by lending shares to short sellers. “.”.
Trump Media informed its shareholders, “If the price of the stock actually drops, then the brokerage firm and the sophisticated and institutional investors will have made a profit, while the ultimate retail investor has not.”.
Out of the more than 136 million company shares, only roughly 5 million have been made available for short sales. A significant portion of the 5 million shares were also earlier this month locked up in short positions.
However, in early April, S3 Partners’ managing director of predictive analytics, Ihor Dusaniwsky, told CNBC, “I’m hearing on the Street that if [an amount] of stock becomes available, shorts are taking it down.”. ****.
Updated to provide a clearer explanation of a long position, this story has been updated.
