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I've noticed that a many times while trying to sell short a stock I get this message. (I use Scottrade as my broker).

I think these stocks are being manipulated, for example, stocks like BSFT that are already selling at a very high P/E and then spike up even higher when there's some exciting "news".

The fact that there are no shares available for shorting seems to confirm my suspicion, it means that there's really few people holding the stock in their accounts, it is just being bought and sold, usually quickly, by large players who seem to operate outside the constraints of what regular investors can do.

If a stock spikes up very high, but no shares are available to short at that price, it means there is no real market for the stock at that price, the broker is essentially saying: "at this price no short selling, only suckers who want to buy!" Can anybody shed any light on this?

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Obligatory "the market can remain irrational longer than you can remain solvent". –  fennec Mar 12 '11 at 20:44
    
"it means there is no real market for the stock at that price" ... It can also just mean that all of the shares that are lendable are already borrowed and sold short. There are certain kinds of shareholders that aren't going to lend their shares. –  Brian Feb 19 at 20:16
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3 Answers

In finance, short selling (also known as shorting or going short) is the practice of selling assets, usually securities, that have been borrowed from a third party (usually a broker) with the intention of buying identical assets back at a later date to return to the lender.

Remember your broker has to borrow it from somewhere, other clients or if they hold those specific stocks themselves. So if it isn't possible for them to lend you those stocks, they wouldn't.

High P/E stocks would find more sellers than buyers, and if the broker has to deliver them, it would be a nightmare for him to deliver all those stocks, which he had lent you(others) back to whom he had borrowed from, as well as to people who had gone long(buy) when you went short(sell). And if every body is selling there is going to be a dearth of stocks to be borrowed from as everybody around is selling instead of buying.

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+1 - If I may add - it's possible to have 'naked shorts', the term for shorting when not properly borrowing the shares. This is illegal. Not for you, you don't know, but for the broker. –  JoeTaxpayer Mar 11 '11 at 19:51
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It's not always illegal-- at least not for market makers it isn't/ –  Pablitorun Feb 2 '12 at 15:34
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Shorts are difficult because you have to find someone to lend the stock to you. In contrast, put options don't require that. They also have some nice properties like you're only out the contract price. The options chain for BSFT will give you an idea of where the market is.

Keep in mind that BSFT only IPO'd last year and announced blowout earnings recently. Make sure the P:E you're looking at is using recent earnings reports!

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You can't short a stock unless there is someone willing and able to "lend" shares to you. And there are several reasons why that might not be the case.

First, BSFT is a "new" stock, which means that NO ONE has held it very long. It's much easier to short IBM or Exxon Mobil, where there are some long-term holders who would like to earn a little extra money lending you THEIR shares. But if "everyone" involved is busy buying or selling the stock, there won't be many people to lend it. That's not manipulation, that's just the market.

Another reason may be a large "short" interest. That is many OTHERS have shorted it before you. That's dangerous for you, because if some lenders want to pull their shares off the market, they can cause a "short squeeze" that will drive the price much higher.

And stock shortages can be orchestrated by the company or large investors to artificially drive the price higher.

Unless you have a lot of experience, don't try shorting small cap stocks. Try to gain some experience with large caps like IBM or Exxon Mobil first. Those are stocks that people at least can't "play games" with. YOu will win or lose based on the market itself.

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