A:

In a short-sale transaction, shares are borrowed from the lender by the short seller and sold in the market. The lender of these shares continues to maintain a long position, hoping the shares will go up in value.

If the lender wants to sell the stock, the implications for the short seller will depend on where the shares were borrowed from—generally either from the brokerage firm's inventory or from the margin account of one of the firm's clients. Margin accounts differ from cash accounts in that they allow the firm to use shares held in these accounts in various ways, including lending them for short sales. If the brokerage firm has taken the shares from its client's account, and that client wishes to sell the stock at some point while the short position is being held, the client is able to do so.

This sale by the client who was lending shares will usually have no effect on the short seller, as the firm will either borrow the shares from another firm or use other shares in its own inventory. For example, if Jack has 100 shares that are lent out to the short seller and Jack now wishes to sell the 100 shares, all he has to do is inform his brokerage firm. The firm will then look in its inventory, and if there are 100 shares, the firm will sell them on the market and put the proceeds into Jack's account. The brokerage firm will now be the one that is owed the shares by the short seller, Jill. However, what could hurt Jill is if the brokerage firm decides that it no longer wants to hold its position in the stock and it is unwilling to continue to lend the shares to her. The brokerage firm has the right to call any short seller to return the shares at any point in time. In this case, Jill the short seller will have to return the shares to the brokerage firm by purchasing them on the market, regardless of whether she ends up incurring a loss or a gain.

If you are the one whose shares are being lent out by your broker to a short seller, your part in the short sale transaction will have no effect on your ability to sell the shares. During the short sale, your shares are the ones currently being designated as lent out by the brokerage firm, but the broker essentially owes you shares. When you want to sell the shares, the broker is required to replace your shares so you may sell them on the market. In our current age of electronic-based shares and transactions, all of this is done without your knowledge and has little effect on the average client. (See also: Short Selling and Margin Trading.)

RELATED FAQS
  1. When short selling a stock, how long does a short seller have before covering?

    The lender of the shares in a short sale has the ability to request the shares be returned at any time, with minimal notice, ... Read Answer >>
  2. How is it possible to trade on a stock you don't own, as is done in short selling?

    Understand how the process of short selling allows a person to sell a stock without technically owning it. Read Answer >>
  3. Here's What Short Sellers Must Do to Short a Stock

    Learn what benefits a short seller is required to make up to the lender of shares, or long investor, when shorting a stock ... Read Answer >>
  4. Can you short sell stocks that are trading below $5? My broker says that I can't.

    Short selling can be very risky for both the investor and the broker. Brokers will often tell investors that only stocks ... Read Answer >>
  5. Why do you need a margin account to short sell stocks?

    The reason that margin accounts and only margin accounts can be used to short sell stocks has to do with Regulation T, a ... Read Answer >>
Related Articles
  1. Financial Advisor

    The 5 Most Shorted NYSE Stocks (VALE, CHK)

    Understand what a short sale is and why people would want to initiate a short strategy. Learn about the top five most shorted stocks on the NYSE.
  2. Investing

    The Truth About Naked Short Selling

    The media demonizes naked short selling, but it usually occurs after a collapse, not before.
  3. Investing

    Why Short Sales Are Not For Sissies

    Short selling has a number of risks that make it highly unsuitable for the novice investor.
  4. Trading

    Short Squeeze

    A short squeeze refers to a jump in a stock's price, forcing a large number of short sellers to close their position, which in effect pushes the price even higher. When an investor shorts a stock, ...
  5. Investing

    Best Performing Short Stocks of 2018 YTD

    Based on short interest, Snap, Tesla, AT&T take the top 3 spots for best returns to short sellers.
  6. Investing

    Bank of America Short Interest Declines Again

    With Bank of America shares trading at eight-year highs, short sellers continue to run away.
  7. Trading

    Guide to Short Selling

    Want to profit on declining stocks? This trading strategy does just that.
RELATED TERMS
  1. Short (or Short Position)

    Short or shorting is selling first and buying later, with the ...
  2. Short Interest

    Short interest, an indicator of market sentiment, is the amount ...
  3. Buy To Close

    Buying to close involves purchasing an offsetting position to ...
  4. Real Estate Short Sale

    In real estate, a short sale is when a homeowner in financial ...
  5. Stock Loan Fee

    A stock loan fee, or borrow fee, is a fee charged by a brokerage ...
  6. Member Short-Sales Ratio

    Member short-sales ratio compares the number of short sales transacted ...
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center