Let's say that I short-sell 1 share that A lent to me and B immediately bought from me.

  1. Doesn't this create additional share in the market because A will see it as "lent out" in his bank account and B will also see his newly purchased share.
  2. If so, then when each time short seller sells a share, then does that increase "shares outstanding" amount? Or is that tracked under some other metric?
up vote 3 down vote accepted

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).

  • So, total_long_positions=shares_outstanding+shares_shorted? What is the financial name for "total_long_positions", because I imagine if I would count shares across all shareholders, then it would have to add up to total_long_positions and not shares_outstanding? – Hans Solo Aug 10 at 1:28
  • BTW, in my example there was A, B and Me. A would have 1 share that is lent out. B would have 1 share that is not lent out. And I would have -1 share. – Hans Solo Aug 10 at 1:31
  • "So, total_long_positions=shares_outstanding+shares_shorted?" Yes but I would frame it as Total Long Shares + Total Short Shares = Outstanding Shares. This might confuse things more but imagine a managed fund that does some shorting to hedge a long portfolio. You give them $100k and with that, they short $20k of stock. If prices are unchanged, you own $120k of stock but you are short $20k of stock, equaling the $100k that you gave them. It all adds up to the original amount until share price changes valuation. It's the same with the shares in your example. – Bob Baerker Aug 10 at 1:44
  • Shares outstanding only changes from corporate events. – Bob Baerker Aug 10 at 1:46

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

  • So, in presence of short selling the sum of all shares across all shareholder accounts (including the ones that lent out their shares) is more than shares outstanding? Or it adds up to shares outstanding? – Hans Solo Aug 10 at 1:35
  • @HansSolo The sum of shares is same. Its similar to if you let your friend borrow your car, the number of cars are same. There is an additional entry / tracking between you and your friend that you need to return one car. – Dheer Aug 10 at 4:11

Your Answer

 
discard

By clicking "Post Your Answer", you acknowledge that you have read our updated terms of service, privacy policy and cookie policy, and that your continued use of the website is subject to these policies.

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