Personal Finance & Money Stack Exchange is a question and answer site for people who want to be financially literate. It's 100% free, no registration required.

Sign up
Here's how it works:
  1. Anybody can ask a question
  2. Anybody can answer
  3. The best answers are voted up and rise to the top

If I short a stock and then the company goes bankrupt, what obligation do I have to fulfill to my broker? I can no longer buy the stock back because the stock (i.e. the company) no longer exists, so what can I do? By bankruptcy, I mean something like Lehmann brothers that does not exist any more.

share|improve this question
    
Yes, shares are not publicly traded any more, that is what i meant – Victor123 Mar 3 '14 at 2:28
up vote 8 down vote accepted

When you take on a short position you have "borrowed" those shares to sell on the market. To counter that position you would buy back those shares but if the company you shorted is no longer listed then those shares would be significantly devalued. (In many cases this means that the shares no longer have any value at all.) This essentially means you do not own any obligations.

share|improve this answer
2  
"no longer listed" does not equate with "worthless". – Chris W. Rea Mar 3 '14 at 3:28
    
True. I was generalizing for the purpose of answering the question but to clarify "no longer listed" does not always mean worthless. – PipAdvisor Mar 3 '14 at 3:30

For some reasons you don't have to worry about buying to cover shares.

This is because when you short, you are borrowing from a stockholder and paying an interest rate to the stockholder. This interest rate is also based on the demand, if shares are hard to borrow yet there are people that want to short, then interest rates can be higher. When a company goes bankrupt, their shares aren't even worth charging an interest rate for. And you can borrow forever if you aren't paying dividends and interest, bankrupt companies are not paying dividends.

Basically, you don't have to give it back.

There generally is not a giant short squeeze in the pink sheets market of a bankrupt company.

share|improve this answer

When you short you are borrowing shares and are charged for doing so. If a company files bankruptcy you will be paying interest on those shares till the courts decide what happens. Say you have a position of 10 000 value of shares short. You may be paying 5.5 percent yearly rate of but compounded daily. A three or four year wait time for the courts to decide may prove to be costly on the amount you pay for borrowing those shares.

share|improve this answer
    
Welcome to Money.SE. Do you have any reference to support this? If true, I'd imagine we'd have heard of this issue, at least those of us who obsessively reading multiple professional journals on finance and investing. – JoeTaxpayer May 19 at 15:13

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.