Quote:
Originally Posted by Daneskold1
Who is borrowing from your broker? You can withdraw cash from your credit card and put it in your checking account for $.10 on the dollar of that thing
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Dear Banned Daneskold,
Since a couple of others have misconceptions about this, here's an example.
Salty owns 20,000 shares of Trump Media. The current price is $50 a share. So his position is worth 20,000 x 50 = $1,000,000
McCain wants to sell 20,000 shares of Trump Media short. He has to borrow the shares, through his broker, from one of the shareholders of the company to do so.
Salty's broker takes the shares in his account and loans them to McCain's broker. McCain's broker sells them at $50, initiating his short position. As long as the share price stays at $50, McCain will have to pay $1,000,000 to buy back the shares and close out his position. (He also has to pay fees to borrow the stock -- more on that later.) At that point the shares go back to Salty.
What happens if Salty decides to sell his shares? Then McCain's broker will scramble to find other shares to borrow, to replace Salty's. If he's successful then all will be hunky dory. If not, McCain will be forced to cover his position. Usually this happens when the share price is on a roll upwards, so McCain will end up closing out his position with a loss. And he won't be able to get back in for the time being, because other investors have borrowed all the available shares. Typically shares become available after the share price goes down.
Now McCain isn't the only person who wants to borrow shares. A lot of other people want to sell short too -- hedge funds, Hillary Clinton, Vitaman, and Yssup to name a few. So there's a lot of competition to borrow shares to short. Are Salty and his broker going to loan those shares for free? Hell no. They're going to get paid for it. Please note earlier in the thread I checked on how much I'd have to pay to borrow Trump Media shares to short on a particular day, and it worked out to an 800% per annum borrow rate.
So, say McCain sells the shares short, and the borrow rate doesn't change, and the share price doesn't change, and he holds the position for a year. This of course won't happen. Odds are the price will be much higher or lower (more likely much lower) in a year. And furthermore the borrow rate will go down. 800% is awfully high. But please humor me.
So, in the course of a year, McCain will pay $8,000,000 in stock borrow fees to maintain his $1 million short position. Who gets that $8,000,000? Well, it might be shared 50/50, between Salty and the broker. So Salty gets $4,000,000 and his broker gets $4,000,000. That assumes McCain and Salty's accounts were at the same broker.
That's not going to happen though. It's very possible, given the timing of their purchases and sales and the borrow fees, that Salty and McCain may both end up losing money.
Jim Cramer used to say bulls make money, bears make money, pigs get slaughtered. That's kind of stupid. George Soros and Warren Buffet are both pigs and they've made out like bandits. But anyway one entirely possible scenario is that McCain gets slaughtered, Salty gets slaughtered, and their brokers pig out.
