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Thread: Short selling: why would anyone lend you their share?

  1. #1
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    Short selling: why would anyone lend you their share?

    I can't see what the lender gets out of it, other than humiliated.
    "Occam" is the name of the alien race that will enslave us all eventually. And they've got razors for hands. I don't know if that's true but it seems like the simplest answer."

    Stephen Colbert.

  2. #2
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    The lender (a broker, rather than the owner of the shares) receives a commission for providing the service, and interest on the loan.

    Grant Hutchison

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    And to add to that, I think the lender doesn't necessarily have to know that the share has been traded like that. They end up at the end with the same stock. And if they decide in the middle of the short trade to sell the share, then the broker would have to bear the cost (I think).
    As above, so below

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    Quote Originally Posted by Jens View Post
    And to add to that, I think the lender doesn't necessarily have to know that the share has been traded like that. They end up at the end with the same stock. And if they decide in the middle of the short trade to sell the share, then the broker would have to bear the cost (I think).
    Yes, the trader doesn't know who owns the shares, the owner has signed a contract allowing the broker to lend in this way and doesn't necessarily know what the broker is doing, the broker carries the risk associated with lending the shares and therefore reaps the reward in the form of commission and interest.

    Grant Hutchison

  5. #5
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    Quote Originally Posted by parallaxicality View Post
    I can't see what the lender gets out of it, other than humiliated.
    Typically, the short seller has reason to think the stock price will drop and can make money on that by buying stock back later at a lower price. The lender thinks differently, and can make money if they are right, and on fees. It is also used in commodity hedging. It gets into risky investment strategy so I never tried it. I always go with long term investment in stocks or funds I have researched. This is about the GameStop thing right?

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  6. #6
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    Quote Originally Posted by parallaxicality View Post
    I can't see what the lender gets out of it, other than humiliated.
    What’s humiliating about it? Depending on the brokerage arrangement, the owner of the shares may not even be aware they have bern lent out.

    Generally, it is done for fees. Most of the time, the fees are really small, but when an asset becomes difficult to short, they can be more substantial.

    If the asset pays a dividend or other income while it is lent out, the borrower has to pay those. The one thing they can’t give the lender us voting rights, so if you lend shares out just before the annual meeting, you can’t vote.

    Some of the other answers are saying that short sellers are betting that the price of the asset will go down, but this isn’t always the case. For example, options dealers may sell short. When they do so, they’re usually not betting that the price will go down. They may have sold options that increase in value when the price goes down. If the option dealer doesn’t do anything else, then s/he is stuffed if the price does go down - the people who bought the options will make a lot of money, and this comes from the option dealer. So the dealer may use short selling to hedge the risk - if the price goes down, the gain from the short sale offsets the loss on the options. So in this case, it is not the option dealer betting that the price will go down, but possibly the dealer’s clients who are.

    Short selling can occur when no one is betting that the price will go down. Suppose someone owns an asset. They are concerned that the price of the asset may decline. So they buy a put option, which protects them from this risk (put options increase in value when the asset price goes down). The option dealer is now on the hook if the price goes down, and sells the asset short to be protected from that risk. The person who holds the asset isn’t betting that the price is going down, and neither is the option dealer. They are both taking steps to limit their losses if the price goes down,
    A: "Things that are equal to the same are equal to each other"
    B: "The two sides of this triangle are things that are equal to the same"
    C: "If A and B are true, Z must be true"
    D: "If A and B and C are true, Z must be true"
    E: "If A and B and C and D are true, Z must be true"

    Therefore, Z: "The two sides of this triangle are equal to each other"

  7. #7
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    I've long thought that the major difference between Wall Street and Las Vegas is that there are fewer crooks running Vegas.
    Cum catapultae proscriptae erunt tum soli proscript catapultas habebunt.

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    Quote Originally Posted by Van Rijn View Post
    Typically, the short seller has reason to think the stock price will drop and can make money on that by buying stock back later at a lower price. The lender thinks differently, and can make money if they are right, and on fees. It is also used in commodity hedging. It gets into risky investment strategy so I never tried it. I always go with long term investment in stocks or funds I have researched. This is about the GameStop thing right?
    Yep. But I felt talking about that specifically might get political fast.
    "Occam" is the name of the alien race that will enslave us all eventually. And they've got razors for hands. I don't know if that's true but it seems like the simplest answer."

    Stephen Colbert.

  9. #9
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    Quote Originally Posted by parallaxicality View Post
    Yep. But I felt talking about that specifically might get political fast.
    Iím not clear why? Yes, there has been discussion in the news of possible regulation, but there is nothing inherently political about the GameStop story. Nothing particularly new about this kind of event either, except it is very visible and this Robinhood company made it easier for small investors to make a play like this. (As I understand it, the company allows purchase of fractional shares, something other brokerage companies are moving to as well.) You wouldnít get me in on something like this without a working time machine, though. If you get in and out at the right times you could make a lot of money, but youíre playing with a quick moving bubble that can collapse at any time.

    "The problem with quotes on the Internet is that it is hard to verify their authenticity." ó Abraham Lincoln

    I say there is an invisible elf in my backyard. How do you prove that I am wrong?

    The Leif Ericson Cruiser

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    Quote Originally Posted by Van Rijn View Post
    I’m not clear why? Yes, there has been discussion in the news of possible regulation, but there is nothing inherently political about the GameStop story. Nothing particularly new about this kind of event either, except it is very visible and this Robinhood company made it easier for small investors to make a play like this. (As I understand it, the company allows purchase of fractional shares, something other brokerage companies are moving to as well.) You wouldn’t get me in on something like this without a working time machine, though. If you get in and out at the right times you could make a lot of money, but you’re playing with a quick moving bubble that can collapse at any time.
    Yes, some people are going to get badly burned, I think. It looks like a lot of people have become caught up in a sort of social media moral crusade, without having a real grasp on the risks involved, and with a fairly simplistic notion of how short selling works and why people do it.

    Grant Hutchison

  11. #11
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    I personally find short-selling unethical. A broker should be warning his client to ditch collapsing shares, not stringing him along so that other stockholders can make money from nothing.
    "Occam" is the name of the alien race that will enslave us all eventually. And they've got razors for hands. I don't know if that's true but it seems like the simplest answer."

    Stephen Colbert.

  12. #12
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    Quote Originally Posted by parallaxicality View Post
    I personally find short-selling unethical. A broker should be warning his client to ditch collapsing shares, not stringing him along so that other stockholders can make money from nothing.
    I think there are many people who will hold onto shares despite fluctuations in price (not necessarily "collapsing") that a trader might be able to make money off of. For example, they may receive stocks as part of their salary, or might be investing in a company they like. Plus, the broker themselves might not think the price is going to go down, but the trader might have their own reason for thinking so.
    As above, so below

  13. #13
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    Quote Originally Posted by parallaxicality View Post
    I personally find short-selling unethical. A broker should be warning his client to ditch collapsing shares, not stringing him along so that other stockholders can make money from nothing.
    I donít really understand. If a stock is truly collapsing, there would undoubtedly be news about it. A full service broker might be reminding clients about that, but these days, most people donít pay for full service brokers and look out for themselves, unless they get into the money management firms, which typically have pretty high minimums (like a half million or million) before they would handle someoneís money.

    But for instance with GameStop, Iíve never bought a share, yet I knew about their basic issue a year or more ago: Their business model has been based on physical game media, which is fading. They recently had a deal with Microsoft which could help them, but it isnít clear to me how it would lead to much actual growth, but it might keep them viable for a longer time. If a person is investing in stock, I expect them to do at least some research on it. If they donít keep up, thatís their fault.

    As for short-selling, why not? It is just a financial strategy. Different people have different strategies, different reasons for making the choices they do.

    "The problem with quotes on the Internet is that it is hard to verify their authenticity." ó Abraham Lincoln

    I say there is an invisible elf in my backyard. How do you prove that I am wrong?

    The Leif Ericson Cruiser

  14. #14
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    Quote Originally Posted by Trebuchet View Post
    I've long thought that the major difference between Wall Street and Las Vegas is that there are fewer crooks running Vegas.
    The mafia was less stingy. They didn’t mind spending on spectacular shows, as opposed to shaking down every cigarette vendor.

  15. #15
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    For anyone still paying attention, GameStop has dropped dramatically the last two days. Itís still far above what it was before the run up, but it probably will drop a lot more.

    Meanwhile, my long term investments are doing fine. Iím not impressed by this game.

    "The problem with quotes on the Internet is that it is hard to verify their authenticity." ó Abraham Lincoln

    I say there is an invisible elf in my backyard. How do you prove that I am wrong?

    The Leif Ericson Cruiser

  16. #16
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    Quote Originally Posted by parallaxicality View Post
    I personally find short-selling unethical. A broker should be warning his client to ditch collapsing shares, not stringing him along so that other stockholders can make money from nothing.
    As Gordon Gekko said in the latest Wall Street movie, "All the things I went to prison for are legal now".
    "I'm planning to live forever. So far, that's working perfectly." Steven Wright

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