Negative Carry

A situation where the cost of holding a position exceeds the income it generates. Shorting a dividend-paying stock creates negative carry because the short seller must pay the dividend to the lender. Negative carry also applies to trades where borrowing costs exceed yield, such as buying a low-yielding currency funded by a higher-yielding one. While negative carry erodes returns over time, traders accept it when they expect capital appreciation to more than compensate for the ongoing cost.