Quote:
Originally Posted by jjjayb
You're borrowing shares from someone with the promise to give them back at a set later date. You borrow them and sell them at the higher price hoping the value will drop so you can buy them back at a lower price and return them to the original owner.
In simplistic terms, say shares of xyz are going for $10 a share. You borrow 100 of them and sell them at $10 a share making $1,000. Then when the stock plummets to $1 a share you buy them back for $100 and return the shares to the original owner. You've netted $900. But what hedge funds are doing is on a much larger scale.
The biggest issue is when these large hedge funds short stocks they sometimes try to purposely drive the stock prices down to reap the rewards. They go on CNBC and other business channels and talk shit about a stock to get people to drop it like a hot potato. It's slimey.
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I get that much, but the whole "borrowing" part. I never really understood that part of it. How do you borrow a stock to sell? I'm assuming its just a mechanism built within TDAmeritrade or whatever brokerage you use.