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Let's say that I short-sell 1 share that A lent to me and B immediately bought from me.
When share are loaned out by (A) to (B) who wants to short the shares, the actual shares are no longer in (A)'s account. There's a book entry indicating that (A) owns them (an IOU) but there is no longer any physical possession. (B) now sells the shares that he borrowed to (C) who now owns them and has physical possession.
No new shares have been created in this process. However, a new long position and a new short position have been created. So if this involved 100 shares, the end result would be that (A) owns 100 shares (IOU), (B) is short 100 shares and (C) owns 100 shares for a book entry total of +200 shares and -100 shares which equals +100 or the original amount of shares.
The brokers keep track of these transactions as well as borrow costs to be paid by (B) to (A) as well as any dividend paid from (B) to (A) if (B) is short the shares on the ex-dividend date while (C) gets the actual dividend).
No. It doesn't.
Think of it like you borrowed a car from friend and sold to someone. There is only one car, but there is a broker who will keep track of the borrowing, ensure that you pay interest and dividend to the owner. At some point but another car and give it back to you friend
Legally no new shares are created, however, new shares for trading purposes are created. It's like copying a digital file and creating new copies. The owner owns the original but new traders can trade the copies. This has a dilutive effect on stock prices as supply increases. All copied shares (shorted shares) are traded just like regular shares in the open marketplace.
If I have a wheel barrel and my broker borrows it and lends it to someone, I am short it and the person the broker lends it to sells it to someone that person now possesses it, So I am short it, the person who sold it is short it and only one wheel barrel exist. In reality, it does not change the issued and outstanding shares, but being these shares can be traded as real shares they can greatly affect the liquidity of the stock and have a ghost effect of heavy dilution that can bog the stock price down. As well there is the additional effect of nacked shorts which are shorted shares that are not even borrowed they are shares shorted that do not even exist. Unethical Brokers and as well preferred shareholders with huge conversion ability will naked short shares and push the price down and heavily dilute the stock to keep the value dropping, most preferred shareholders will have conversion based on value and the lower the share price the greater number of shares they get on conversion after they naked short sometimes millions of shares and pushed the price down that will convert their preferred shares of which disclosure of this is stated to the public and counted in the weight of further dilution which as well puts down pressure on the stock price, and the preferred acting with a clearly crooked broker will by back the shares in the public sell-off as the price drops and distribute the converted shares to those that do not sell their shares back and cancel out the naked shorts. So it depends on a lot of factors in relation to how the short is being done.
