1

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

  • 1
    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
2

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.

|improve this answer|||||
  • 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

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

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