It is true, as farnsy noted, that you generally do not know when stock that you're holding has been loaned by your broker to someone for a short sale, that you generally consent to that when you sign up somewhere in the small print, and that the person who borrows has to make repay and dividends. The broker is on the hook to make sure that your stock is available for you to sell when you want, so there's limited risk there.
There are some risks to having your stock loaned though. The main one is that you don't actually get the dividend. Formally, you get a "Substitute Payment in Lieu of Dividends." The payment in lieu will be taxed differently. Whereas qualified dividends get reported on Form 1099-DIV and get special tax treatment, substitute payments get reported on Form 1099-MISC. (Box 8 is just for this purpose.) Substitute payments get taxed as regular income, not at the preferred rate for dividends.
The broker may or may not give you additional money beyond the dividend to compensate you for the extra tax.
Whether or not this tax difference matters, depends on how much you're getting in dividends, your tax bracket, and to some extent your general perspective.
If you want to vote your shares and exercise your ownership rights, then there are also some risks. The company only issues ballots for the number of shares issued by them. On the broker's books, however, the short sale may result in more long positions than there are total shares of stock. Financially the "extra" longs are offset by shorts, but for voting this does not balance. (I'm unclear how this is resolved - I've read that the the brokers essentially depend on shareholder apathy, but I'd guess there's more to it than that.)
If you want to prevent your broker from loaning out your shares, you have some options:
- Some brokers may let you opt-out in writing. (This may include options like having the shares re-registered in your name instead of being held in "street name.")
- If you have a cash account rather than a margin account, your broker is prohibited from loaning your stock.
- I've heard but not confirmed that if you have a good-til-canceled (GTC) order on, then your stock cannot be loaned. If true, you could put such an order in at a price far from the market price if you want to prevent the loan.