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Annie owns shares of GameStop, and Annie and her broker have an agreement that allows the broker to lend Annie's shares to short-sellers. The reason has to do with the nature of the short-sale transaction itself.Īs an example, take a situation involving four investors. However, even without a naked short sale, it's theoretically possible for short interest to exceed 100%. This can lead to market disruptions, and while there are some exceptions to the regulations, most brokers stop regular retail customers from selling stock short if they can't obtain shares to borrow. With a naked short sale, the broker allows the customer to do a short-sale transaction without actually arranging to borrow the shares beforehand.
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Securities and Exchange Commission regulations designed to prevent what's known as "naked" short selling. Once all the shares have been borrowed, you might think there wouldn't be any more for short-sellers to get. Round and round shares goĪt first glance, it might seem like you could never have more than 100% of a company's shares sold short. If shares just aren't available, the broker generally has the right to close your short position automatically. Ordinarily, your broker will find other shares that you can borrow in their place. The investor who loans you the shares has the right to get them back at any time with little notice.
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If it's hard for your broker to find shares that you can borrow, you may end up having to pay a borrowing charge to get the stock to sell short. That sounds simple, but there are some facts to remember. Pocket the difference if the stock has dropped since you sold it short, or find money elsewhere to make up the deficit if the shares got more expensive in the interim.At some future date, buy back the shares, hopefully at a price that's cheaper than what it was when you sold the shares.Take the shares that you've borrowed and sell them on the open market.Go to your broker and find out if your target has shares available for you to borrow.If you want to sell a stock short, here's a simple guide to the process: