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Question About Short Selling Stock and Lending Stock From Broker...

Discussion in 'Business & Tax Advice' started by LOL-Blaster, Nov 8, 2012.

  1. LOL-Blaster

    LOL-Blaster Regular Member

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    Did some research about short selling and I still don't understand a few concept:

    - Why would the broker want to lend stock and then take it back when it has less value?
    It's like lending your car to someone, have it crash it and then take it back.

    - When bank gives out loan, they take interest.
    When you short selling stock, you give back the exact amount of stock you borrow.

    That makes no sense in the broker side from a business point of view.
    Why would he want to lend them? To take in a few buck of commission?
     
  2. GauravJ

    GauravJ Power Member

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    Hi,

    First make yourself clear what Short Selling is?
    Broker borrows stock from another client and then lends it to you
    so that you can short sell the stock/scrip and in return of it charges you a fees

    Now why anyone would want to lend stock and then take it back when it has less value?
    To answer this first understand that It's a market place where there are number of investors holding stocks with different intentions.
    Think of a long term investor who wants to hold stock but at same time looking for better returns than simply earning dividend- Stock lending and borrwoing mechanism is ideal option for such guys.
    Similalry, Mutual Funds and Pension funds also benefits out from this deal.

    Besides this, Brokers too actively take interest in such deals esp. of Blue chip stocks as on daily basis they are able to manage delivery on their own as such stocks have turnover in millions od scrips.

    Hope I am able to clear your doubts....If not feel free to send me a PM

    Thanks
     
    • Thanks Thanks x 1