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How do you "borrow" someone's stock share and sell it?
Posted on 1/28/21 at 12:49 pm
Posted on 1/28/21 at 12:49 pm
Not an investor at all. I don't understand how somebody can borrow my 3 shares of company stock that I do own and then sell it. It's my stock. How can they borrow stock that belongs to me? I don't understand this at all.
17
Posted on 1/28/21 at 12:50 pm to BFIV
Do you have a 401(k)?
Posted on 1/28/21 at 12:51 pm to BFIV
I think you sign a contract to repurchase the stock + profits for the stock holder and take actual possession of the stock.
It's seen as "borrowing" because you're buying to sell it back quite soon.
That's my understanding.
It's seen as "borrowing" because you're buying to sell it back quite soon.
That's my understanding.
Posted on 1/28/21 at 12:52 pm to BFIV
quote:
Not an investor at all. I don't understand how somebody can borrow my 3 shares of company stock that I do own and then sell it. It's my stock. How can they borrow stock that belongs to me? I don't understand this at all.
It's kind of like when your neighbor borrows your ladder, he then charges someone else rent to use the ladder while he's in possession of your ladder.
Posted on 1/28/21 at 12:52 pm to BFIV
You’re basically gambling on the price to go down because you have to repurchase the stock later and return it.
Posted on 1/28/21 at 12:54 pm to BFIV
Pretty easy. You let your brokerage know that you have stock and are willing to lend it to earn interest. You sign the margin account papers and then your brokerage will ask you what you want to lend. You then lend it to a short.
Note: short selling is a part of the game. It’s a bet the stock goes down. Naked shorting is illegal but happens. The RH traders called out the hedge funds on this with GME.
Note: short selling is a part of the game. It’s a bet the stock goes down. Naked shorting is illegal but happens. The RH traders called out the hedge funds on this with GME.
Posted on 1/28/21 at 12:55 pm to BFIV
It is a speculation option.
You want to buy a stock for $100
Short seller sees an opportunity because he thinks the price will drop very soon. He agrees to sell you a stock for $100 and hopes the price will drop.
The price drops to $75. He buys for $75 and sells to you for $100. Thus makes a profit on the transaction.
Now if the stock price soars to say $750 a share, he is screwed. He still has to cough up a stock but now has to pay $750 and charge you $100.
You want to buy a stock for $100
Short seller sees an opportunity because he thinks the price will drop very soon. He agrees to sell you a stock for $100 and hopes the price will drop.
The price drops to $75. He buys for $75 and sells to you for $100. Thus makes a profit on the transaction.
Now if the stock price soars to say $750 a share, he is screwed. He still has to cough up a stock but now has to pay $750 and charge you $100.
Posted on 1/28/21 at 12:55 pm to Azkiger
It’s a simple concept. It’s done to make a quick profit. They borrow the shares, sell them quickly at market price for say $100.
After a month (the amount of time agreed on to return the borrowed shares) they are hoping the price is way down. Maybe they are buying the same shares back for $50. They return the same borrowed shares, but made $50 off the deal.
Short selling can be nefarious. During that month span these people post and write all kinds of negative articles, or may even try to sabotage a company lol, just so the price is driven down.
I’m glad the shorts are getting squeezed. Either invest your own hard earned money or don’t at all
After a month (the amount of time agreed on to return the borrowed shares) they are hoping the price is way down. Maybe they are buying the same shares back for $50. They return the same borrowed shares, but made $50 off the deal.
Short selling can be nefarious. During that month span these people post and write all kinds of negative articles, or may even try to sabotage a company lol, just so the price is driven down.
I’m glad the shorts are getting squeezed. Either invest your own hard earned money or don’t at all
Posted on 1/28/21 at 12:55 pm to BFIV
They have a “contract” where they borrow stocks (say at $20 and sell them, but then they have to return the same number of stocks back to the person or institution they borrowed them from. So that’s when they buy the stocks back at a lower price and pocket the difference.
Posted on 1/28/21 at 12:56 pm to ApexTiger
quote:
It's kind of like when your neighbor borrows your ladder, he then charges someone else rent to use the ladder while he's in possession of your ladder.
It's not like that at all, because your neighbor bears responsibility for the borrowed ladder.
Shortsellers don't hold onto the ladder, they sell it immediately because they think it's over valued and will only go down in value the more time passes.
The larger the difference between their sale price and the value of the stock when it comes time for them to repurchase it and give it back to the original stock owner is their profits (minus a little bit for the original stock owner).
Posted on 1/28/21 at 12:56 pm to ShermanTxTiger
quote:
The price drops to $75. He buys for $75 and sells to you for $100. Thus makes a profit on the transaction.
That’s not totally correct
Posted on 1/28/21 at 12:57 pm to BFIV
quote:
How can they borrow stock that belongs to me? I don't understand this at all.
i ask you to borrow your truck under the promise that i return it to you in a week.
during that week i have it, i sell it for $100.
before the week ends, i buy it back for $25.
i give you back your truck and i keep the $75.
you still have exactly what you had before the borrow.
no more, no less.
i made $75 profit.
in this case, i couldn’t buy it back at $25.
i had to buy it back at $5,000.
so you still have exact same thing as before.
i’m out $4,900.
Posted on 1/28/21 at 12:57 pm to ApexTiger
quote:
It's kind of like when your neighbor borrows your ladder, he then charges someone else rent to use the ladder while he's in possession of your ladder
Sorry that doesn’t explain short selling at all
Posted on 1/28/21 at 12:58 pm to BFIV
quote:
A short sale is a transaction in which the seller does not actually own the stock that is being sold but borrows it from the broker-dealer through which he or she is placing the sell order. The seller then has the obligation to buy back the stock at some point in the future. Short sales are margin transactions, and their equity reserve requirements are more stringent than for purchases.
LINK
When the stock goes up sufficiently, the broker makes a margin call. That is he automatically buys back the stock at a higher price than it was sold and returns the stock back to the lender.
This is all done almost instantaneously via computer algorithms.
When a margin is called to close out short positions it ends up being a short squeeze because there are so many orders to buy. Buying pressure, i.e., demand causes prices to rise.
HFs short stocks to zero when there is not much buying pressure on an underlying stock, short sell it which puts downward pressure on the stock, trash it on CNBC which puts downward pressure on the stock, quietly close out positions by buying, short again, trash on CNBC again, rinse and repeat until they hit zero or close to zero.
This is the short selling game. It works great when there is little to no buying pressure.
This post was edited on 1/28/21 at 1:04 pm
Posted on 1/28/21 at 12:58 pm to Nutriaitch
quote:
ask you to borrow your truck under the promise that i return it to you in a week. during that week i have it, i sell it for $100. before the week ends, i buy it back for $25. i give you back your truck and i keep the $75. you still have exactly what you had before the borrow. no more, no less. i made $75 profit. in this case, i couldn’t buy it back at $25. i had to buy it back at $5,000. so you still have exact same thing as before. i’m out $4,900
This almost perfectly describes what’s happening to the short sellers
Jump! Jump! Jump!
Posted on 1/28/21 at 12:59 pm to BFIV
The safest/fairest way to short a stock is to buy a Put.
You can only lose what you paid for the option and you have actual capital in the bet.
You can only lose what you paid for the option and you have actual capital in the bet.
Posted on 1/28/21 at 1:01 pm to Sooner5030
Yep
Posted on 1/28/21 at 1:05 pm to EthanL
quote:
ask you to borrow your truck under the promise that i return it to you in a week. during that week i have it, i sell it for $100. before the week ends, i buy it back for $25. i give you back your truck and i keep the $75. you still have exactly what you had before the borrow. no more, no less. i made $75 profit. in this case, i couldn’t buy it back at $25. i had to buy it back at $5,000. so you still have exact same thing as before. i’m out $4,900
In that case, why would I even allow someone to borrow my stock and sell it if I don't make a profit or suffer a loss? What's in it for me with my 3 shares?
Posted on 1/28/21 at 1:07 pm to BFIV
quote:Most retail investors never have any of their shares loaned out. Securities lending usually only applies to very large investment accounts such as pension, insurance or hedge funds.
I don't understand how somebody can borrow my 3 shares of company stock that I do own and then sell it.
Those mega-funds have a security lending agreement with the custodian of their funds. In exchange for agreeing to allow stocks in their account to be borrowed, those large funds are paid a fee based on the value of the stocks borrowed.
So, it's a way for large funds to earn a return via fee income on stocks just sitting in their account.
The agreement also says their broker guarantees any shares borrowed by someone else will be returned to their account. So the broker who holds the account and manages the borrowing of the stocks is ultimately liable for the shares to be returned to the mega-funds account.
This post was edited on 1/28/21 at 1:13 pm
Posted on 1/28/21 at 1:08 pm to BFIV
quote:
In that case, why would I even allow someone to borrow my stock and sell it if I don't make a profit or suffer a loss? What's in it for me with my 3 shares?
because a month or two from now, you borrow a different stock from me and do the same thing.
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