Establishing a Short Position in JMH Corporation Stock

B

To establish a short position in a stock, an investor borrows shares from another investor or a brokerage firm and sells them on the market with the intention of buying them back at a lower price in the future to return the borrowed shares. Based on the given information, Allen Jackson believes that the stock of JMH Corporation is overvalued and expects a 35% drop in its price. Let's analyze the answer choices to determine which action Jackson is least likely to take in order to establish a short position:

A. Borrow the stock from another investor: When establishing a short position, the investor needs to borrow the stock from another investor or a brokerage firm. By doing so, they obtain the shares necessary to sell on the market. Borrowing the stock is a fundamental step in short selling, and it is highly likely that Jackson would need to borrow the stock from another investor to establish his short position. Therefore, this is not the least likely action.

B. Reinvest any dividend payments: When an investor is shorting a stock, they are essentially betting that the stock price will decrease. In this case, Allen Jackson believes the stock is overvalued and expects a price drop. When an investor holds a short position, they are liable for paying any dividends that the stock pays out to the original owner. Therefore, reinvesting any dividend payments would not align with the goal of profiting from the stock's decline. It is less likely that Jackson would reinvest any dividend payments received while holding a short position. Hence, this is the least likely action.

C. Post margin with his brokerage firm: When establishing a short position, an investor is required to post margin with their brokerage firm. Margin is a portion of the total value of the borrowed shares that the investor must provide as collateral to the brokerage firm. It serves as a security deposit and helps protect the brokerage firm from potential losses if the short position moves against the investor. Posting margin is a standard requirement for short selling, so it is highly likely that Jackson would need to post margin with his brokerage firm. Therefore, this is not the least likely action.

In summary, based on the given information, Allen Jackson is least likely to reinvest any dividend payments while holding a short position in JMH Corporation.