User talk:Art Markham

Borrowing a stock IS different than borrowing money, or borrowing, say a car. When you borrow a car, the lender of the car no longer has use of the car. When you borrow stock, from say, HolderA, HolderA continues to own the stock and enjoy the usual benefits of the stock (he gets the dividend and the stock shows up as an asset in his account with NO corresponding liability.) What has happened is you really have borrowed the stock from the broker. When the broker "lends" you the stock for a short sale, the broker really CREATES an additional share of stock (yes this is true). This additional share of stock is then lent to HolderB. HolderB has full ownership privileges of this stock. He gets the dividend and has it show as an asset in his account.

Let us say a company has issued one million shares. Now Shortie shorts 100,000 shares (Shortie's broker does the borrow from HolderA and lends to Shortie). Now Shortie sells the stock to HolderB (using broker). Both HolderA and HolderB own the stock, get the dividend, and have the stock listed as an asset with no corresponding liability. The broker has, in effect, created ADDITIONAL shares of stock. Now there are owners of 1,100,000 shares of stock, for a company that has issued 1,000,000 shares of stock.

The above example shows how a retail broker like Schwab does a short sale. It is true that institutions operate a little differently in that a big institution, say Calpers, actually does "lend" their stock to someone and does, indeed show a liability on their sheets. But the idea is the same, shorting creates additional shares of stock. Now when the short is covered those additional shares disappear.

In an earlier version of this Wikipedia subject I wrote 2 paragraphs explaining just what I wrote above, but someone deleted it.

Again: 1. HolderA buys a share of stock. 2. Shortie "borrows" share of stock from HolderA (through broker). 3. Shortie sells share of stock to HolderB (through broker). 4. A dividend comes from the company that originally issued the stock and goes to HolderA. 5. Shortie has to pay the dividend to HolderB

The issue of understanding the dividend is critical to understanding the process because HolderA gets a dividend and HolderB gets a dividend PROVING that an addition share of stock was "created".