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Borrow a stock worth $100, sell it, collect $100 cash. Buy stock back at a later date for $50 (You thought the price was going to go down right?), give it back
by Sholmesy 8y ago
Borrow a stock worth $100, sell it, collect $100 cash.
Buy stock back at a later date for $50 (You thought the price was going to go down right?), give it back to the original lender.
You have now made $50.
This is my (basic/primitive) understanding of shorting
- jv22222 8y agoThanks! One question: Who do you borrow the stock from? Why do they agree to lend it?
- Judson 8y agoForgive the oversimplification, but you borrow from someone who owns the stock. They lend it because they collect fees/interest when you borrow it.
- samscully 8y agoYou pay the person you borrow the stock from a fee.
- Swenrekcah 8y agoI believe you pay them some small sum for it, so you could call it ‘renting’ the stocks for a short while.
- hndamien 8y agoWhy does somebody else get paid to rent my stocks? Can this be avoided?
- soVeryTired 8y agoUsually people don't go to an exchange directly to buy stocks, they go to a broker-dealer: that's who lends the stock out to short. Fees to short certain stocks can be quite high, so even if the stock dips it's possible to lose money.
- pjc50 8y agoGenerally it's from brokers who are holding it on account, and they agree to lend it for a fee and some collateral. There may be problems finding someone to lend thinly traded stock. Or you can take out a short position and not be able to buy it back at sensible prices: this results in a "short squeeze". https://www.reuters.com/article/us-volkswagen/short-sellers-make-vw-the-worlds-priciest-firm-idUSTRE49R3I920081028 https://www.reuters.com/article/us-volkswagen/short-sellers-... It is possible to lose more money than you invest with short selling, so be careful.
- pathseeker 8y agoIn addition to the sibling answers about collecting interest and brokers, lending stock to short sellers is a good thing if you are a long-term investor. Shorts put some downward pressure on the price and give you an opportunity to buy more at a reduced cost. Additionally, if your thesis on the company being good is true, those shorts are eventually going to be buying back the stock after it has appreciated, ultimately creating even more upward price pressure in the long-term.
- philipodonnell 8y agoFun fact: a lot of ETFs and index funds generate revenue on the backend by lending out the stocks they hold and charging a bit of interest to the borrower.