A short sale question I just can't find the answer

Discussion in 'Trading' started by Renegen, Aug 15, 2007.

  1. Ok, I have a fairly basic short sale question and I heard something a long time ago and just can't find the info to disprove it, so I need your help.

    When you short a stock, you borrow the shares of somebody else and sell them. As far as that person knows, they still own the shares, in fact you need to pay them a dividend out of your own pocket.

    The question is this, if the person who has lent you their shares wants to sell their shares today, at a specific price, are you obligated to buy them the shares, ie covering your short? And what price is it settled at? Or can you stay short as long as you want.
  2. Your broker borrows someone else's shares so you can short stock. If that person wishes to sell their stock, the broker simply borrows someone else's shares to back the short while that original person sells his shares. The point is the broker will always borrow the shares from someone if they are available and you nor the eventual borrowee will know or care where they came from. If the broker cannot borrow shares then they will make you cover your short at the current price whether you like it or not to replace the borrowed shares.
  3. You only have to cover if your broker can no longer borrow shares. I assume they use some kind of last-in first-out basis. I have been forced to cover 1 time in 10 years of trading so it can happen.

    Unless of course they naked short but we don't want to get into that.
  4. Thanks, so a bit of both.
  5. I short quite a few illiquid stocks, so I see forced covers more often than most. I generally get about three or four forced covers a year. It's just one of the risks of selling short, and a cost of doing business. Hasn't stopped me from making money shorting stocks.