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Understanding short selling from the point of view of the Broker.

  • 11-01-2013 11:09PM
    #1
    BrokenArrows
    Registered Users, Registered Users 2 Posts: 7,548 ✭✭✭


    I understand the concept of shorting but I don't understand how brokers make money from this?

    If I make a profit then logically the broker makes a loss by the same amount because they needed to supply the shares at a higher price.


Comments

  • #2
    SBWife
    Registered Users, Registered Users 2 Posts: 1,287 ✭✭✭SBWife


    The broker makes the same commission it would on a purchase. The shares you borrow are owned by another investor not by the broker, they'll lose money if the share price goes down. However, their losses are limited to 100% of the purchase price and their potential gains are theoretically unlimited, whereas the short sellers gains are limited to 100% and losses are potentially unlimited.


  • #3
    BrokenArrows
    Registered Users, Registered Users 2 Posts: 7,548 ✭✭✭BrokenArrows


    SBWife wrote: »
    The broker makes the same commission it would on a purchase. The shares you borrow are owned by another investor not by the broker, they'll lose money if the share price goes down. However, their losses are limited to 100% of the purchase price and their potential gains are theoretically unlimited, whereas the short sellers gains are limited to 100% and losses are potentially unlimited.

    So if I have sold shares that another investor owns, what shares does that investor have when they attempt to sell theirs before I close my short position?


  • #4
    neil.p.b
    Registered Users, Registered Users 2 Posts: 926 ✭✭✭neil.p.b


    Broker will just have an inventory of that stock and take it from that, if the broker doesn't have the quantity available they will just go to a 3rd party broker. If neither of these options are viable (very rare) then you will have to cover your short and buy the stock back.


  • #5
    SBWife
    Registered Users, Registered Users 2 Posts: 1,287 ✭✭✭SBWife


    Normally there is a pool of shares and the shares being sold will be replaced, but you can be forced to buy at the current market in order to cover the position. Usually you'll be aware that their is a potential shortage of a particular share to borrow, it'll be on a list circulated by your prime broker and will be receiving a reduced rebate. Having a position bought in, is another of the risks short sellers face.


  • #6
    BrokenArrows
    Registered Users, Registered Users 2 Posts: 7,548 ✭✭✭BrokenArrows


    I found this vid which explains it.
    I get it now.

    http://m.youtube.com/#/watch?v=-IDmLERenrU


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