Let us say there are 100 outstanding shares of company X held by investor A. Investor B comes in, borrows these 100 shares and short sells them to investor C.

Which means, outstanding shares=100, short interest =100.

Investor B borrows these 100 shares again from C and short sells them to investor D.

So now, short interest is 200 and outstanding shares is 100.

In this case, how can B fulfill his obligation to return the 100 shares to A and 100 shares to C? He can only buy 100 shares but he is short 200 shares

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    D and C are both long 100 each. B can buy from both to close the positions. – JTP - Apologise to Monica Feb 14 '15 at 23:35
  • Thanks. I am confused between your answer and mike Scott answer. They both seem correct, but they aren't the same. – Victor123 Feb 15 '15 at 3:36
  • I can't source it but I believe that borrowed shares cannot be loaned out again. IOW, B can borrow from A and sell to C but C cannot loan those shares out for another short sell. If that were allowed, short sellers would have an infinite supply of shares to short. – Bob Baerker Dec 17 '19 at 14:22

It's called a short squeeze, and for example happened to Volkswagen in 2008. It's a known hazard of short selling, especially in thinly traded stocks. The answer is that investor D can charge investor B whatever he wants for the shares, since investor B has to have them.

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  • Even if investor D charges a lot, he can only sell 100 shares, whereas B( not A) needs to buy back 200 shares,not 100. – Victor123 Feb 14 '15 at 21:47
  • Thanks, have corrected the error, And yes, so assuming investor B returns them to investor A, he then has to buy them back again (at whatever price investor A cares to charge) so as to return them to investor C. – Mike Scott Feb 14 '15 at 21:50

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