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My understanding of short selling is... let's say you sell stock for $50 a share. If you purchase the stock for delivery two days later for $40 and then ship it you've effectively realized a profit of $10 per share.

My questions are...

  1. why wouldn't someone purchasing stocks want immediate delivery?
  2. can you delay shipment for an arbitrary amount of time? if so it seems like you could perpetually hold off on delivering the stock for years or decades until such that company declared bankruptcy or some such and only ship then. ie. wait until the conditions were most favorable to you.
  • you may want to (re)visit some of the questions here about short selling. Generally you borrow the stock to be sold from someone else and pay them a fixed daily amount for holding it for as long as you hold it. There is no such thing as delaying "shipment"; you are thinking about settlement which isn't involved here. – MD-Tech Aug 13 '18 at 13:08
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There are three issues that apply to shorting stocks:

(1) Shares available to borrow

(2) Borrow rate

(3) Margin

If there are a lot of shares available for borrowing, the borrow rate (the fee that you pay to the lender) is low. If not, it's high. For example, today's annual rate for NFLX is 1/4 of a percent. That's peanuts. OTOH, the annual rate to borrow shares of SDRL ($18.50) is 93% and if that remains constant for the year, you'll pay the lender over $17 in fees. That means that in 1.07 years, the stock must be bankrupt and worthless in order to break even on a short position. Still feel like you could hold a short position like that perpetually?

If the number of shares available to borrow is low, it would be easy for them to be "used up" by short sellers, leaving no other shares for shorting. Today, SDRL has only 7,000 shares available to borrow. Should a lender decide that he wants to sell his long shares, another lender must be found. If none are available, someone who is short will get a forced buy in notice. A decent broker gives you until 4 PM to cover your short if you receive the buy in notice. If share price has risen, you will be forced to take a loss.

Then there's the issue of margin. While it requires 50% margin to short, the margin maintenance requirement is only 25% (some brokers impose higher requirements). After you short the stock, the higher it rises, the higher the margin maintenance requirement becomes. While it's possible that you could run out of money to support the position, anyone practicing any kind of disciplined money management would not get that far under water.

In summary, your conclusion that "you could perpetually hold off on delivering the stock for years or decades until such that company declared bankruptcy" isn't realistic.

I'm no stranger to shorting so don't take this as a "The sky is falling" warning. Shorting should not be done unless under the supervision of an experienced adult :->). And if you really want to go in this direction, if the stock offers options (and LEAPs), buy high delta put LEAPs so that you can participate to the downside and you don't have all of the complications I discussed above. Progress to shorting when you have the experience and discipline to effectively manage the position.

  • I think OP is missing something at a very simple level. When shares are sold short, the shares ARE delivered. The seller borrows the shares. The rest of your answer flows after this. OP's Q1 shows a fundamental lack of understanding the process. – JoeTaxpayer Aug 13 '18 at 14:05
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    Agreed but I gave him the benefit of the doubt since he got it right that shorting at $50 and covering at $40 is a $10 profit. Perhaps he meant that when he covers the short, his "purchase for delivery" was to deliver, aka return, the shares? Either way, he's cannon fodder for smart money until he gets the mechanics down :->) – Bob Baerker Aug 13 '18 at 14:10

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