[Closed] Short stock -How can you sell 'borrowed shares'

Whilst you've borrowed them, they are yours to do what you want with them. You only have to give them back at the end, not prove you kept them all the while...

I'm guessing you have a credit card ?

You borrow money, that's not yours, and then sell that money .... you spend it !!

Same difference

If inflation was 200% (but the interest charged on the loan normal ,say 10%) the money you pay back would be "worth" less then the money you spent and you'd be Gordon Gekko

Yeah but don't you need a holding in your own name to sell them, if you borrow the shares rather than buying then, aren't they still in someone else's name?

But why do people lend out shares?

Yeah but don’t you need a holding in your own name to sell them,

Not sure exactly on the mechanism, but no you don't.

Hey John, lend us a tenner and I'll give you £15 back.

Buy £10 of stuff with John's tenner & hope to sell it for £20.  Give John his £15 and keep your fiver, all while never having anything of your own. The risk is in not being able to sell at a profit I guess.

But why do people lend out shares?

For the same reason anybody does anything !! ....To make money, they charge for the privilege

if you borrow the shares rather than buying then, aren’t they still in someone else’s name?

It is effectively signed over to you at the time. The downside is if the market goes the other way then come the day you were supposed to hand them back you have to go and buy them to hand back.
Apparently where it gets really fun/complicated for ownership is for dividends and taxes. Big trial at the moment in Europe for cum-ex which is based around who owned a share at a specific time.

But why do people lend out shares?

Because they get paid to do so.

The lender transfer legal ownership to the borrower who will then transfer legal ownership to the person to whom he has made a short sale. The borrowing agreement requires the borrower to pay a stock loan fee plus to compensate the lender for any payments etc he would have received had he still been legal owner.

So they don't lend them out, rent them out.

You hear a lot about short selling. Is it a big gamble? Does it often go the other way?

If it's looking like Thomas Cook is going belly up, why would you rent out shares rather than just getting shut of them?

You can only short sell a stock on an uptick so you can't guarantee to be able to jump on a plumeting stock and make a pile of cash. However you will have the money from the sale of the borrowed stock in your account.

I'm not sure what happens if the stock is suspended or delisted as you'll never be able to buy it to repay the shares you've borrowed.

Is it a big gamble?

In theory you can have unlimited losses as there is no limit to how high a stock can go and you're loosing money the higher it rises. In reality you can probably close your position off by buying stock to cover your short before your losses get out of hand. Also your broker may close your position buy buying stock on your behalf to stop your losses at a certain point.

Is it a big gamble

Damn right !!

You own a stock at £1 ... the furthest it can fall is £1.

You short a stock at £1 ... the furthest it can go up !?! .... Sky's the limit

Known as a Bear Squeeze ... stock borrow drys up and becomes crazy expensive... the only thing left to do is buy them back 10X 20X 100X higher.

Have a look at the VW/Porsche squeeze from a few years back ... VW became the biggest (highest capitalised) company in the world for a few days ..... sorry gotta go the Street has just opened

Just reading the Thomas Cook stuff and it mentioned short selling so I looked this up as wasn’t sure how it worked.

It says for short trades you borrow shares , sell then re-buy at a lower price. But how can you borrow shares, and how can you sell borrowed shares that arent yours to sell?

They're not really borrowing them as such, they're buying them under an agreement that they will sell them back on a given date at the same price that they bought them for plus a fee.

The shorter will sell the shares as soon as they have control of them. If the shares go down in value they will buy them back at a lower price and return them to the owner and keep the difference. If they go up in value the owner benefits from the extra value plus the fee.

It's another form of financial alchemy and can represent everything wrong with short-term stock dealing because it doesn't create anything, it a pure gamble between the holder and the short-seller and someone has to lose for someone to win. Sadly shorting shares makes bad situations worse as shorting is a sure sign of big trouble and will force the price lower.

and can represent everything wrong

Although in the case of Thomas Cook it's this.

shorting is a sure sign of big trouble

But why do people lend out shares?

If you are say a FTSE 250 tracker, then you buy whatever is in the FTS250 regardless of whether you rate them or not. You can make money lending them to short sellers which allows you to keep the fund fees low as you're basically being paid to hold something you'd have to hold anyway. It's a win win all round...

Not wishing to hijack, but an even more basic question...

What if nobody wants to sell them when you need/want to buy, or vice versa? I guess it maybe doesn’t work quite like that?

What if nobody wants to sell them when you need/want to buy, or vice versa? I guess it maybe doesn’t work quite like that?

You'd be out of pocket, by a lot.

What if nobody wants to sell them when you need/want to buy

See our posts detailing how the price can go through the roof.... that's because no one wants to sell.

Try and to take the fact that it's a stock/company out of the equation .... It is just supply and demand.... Peoples wants and fears

However you will have the money from the sale of the borrowed stock in your account.

You don't generally as this will be used to post as collateral (plus some more) with the stock lender, the level of collateral is reset daily durng the period of the loan to reflect market movements.

All feels like a very underhanded way to make a living.

All feels like a very underhanded way to make a living.

Why should a stock price always go up? Shorting is just taking a bet that you think something is over valued, whereas buying and holding stocks is taking a bet it will go up in value etc.

Although the CEOs of companies being shorted always make out like the shorters are the Devil incarnate etc, which just seems like sour grapes to me. If you're worth it, prove it etc.

Short sellers provided a important service to balance a market.

If demand can be infinite, why should supply be limited to only a handful of holders of stock?

Banning short seller would create a false market.

The shorter also covers any dividends due, I read on a board once someone shorted a stock and it rose, got burnt and had to pay out the divi too.

Don't hedge funds do this.

Also, the trading platforms lend out stock as they know not all holders will want to sell at once, they know the trading history of their clients so know that say 95% rdsb stock never changes hands. You re a brave man shorting shell though.

You can short other things as well - think goods such as gold or silver, coal, nuts, coffee etc. As this is used a aform of financial money making wizardry, the parties never expect to deliver the actual goods, and just settle the financial difference at the agreed date.

There is a tale (possibly apocryphal) of one such purchase where the buyer forgot to tick the right box, and wound up with several hundred thousand tonnes of coal being actually ateempted to be delivered to his office).

The main reason for short selling (and long sellign which is the opposite) is to hedge against financial losses. If you can find two financial things (eg shares in a firm and currency prices for example) you can short one and long the other, and minimise the losses you coul take from some unexpected event.