Are they stocks the broker truly owns, or are they ones he is holding for his customers. I just can't see someone loaning out stocks that they own, and not selling them knowing that prices are falling. It just seems like a scam all round.
NO- they don't have to be stocks that the broker owns.
If YOU hold any stocks- say, you own 100 shares of IBM, then the broker holds YOUR actual stock certificates.
And, anytime he likes, he can "lend" your share certificates to someone else.
Now, should the price go up, the person whom he lent them too is on the hook. If the price goes down, the person whom he lent them to makes money, because he sells YOUR shares at a profit, then is supposed to rebuy shares at a lower cost, and give you your certificates back.
How do you prevent the broker from offering up YOUR shares to someone else in a short-situation? Place a "SELL" order at a higher price --like, if it's a $10 stock, place a sell order, good till cancelled, for $25, and you'll lock up your shares . He can't borrow them if there is a valid sell order on them.
Of course, if you hit $25, then they are sold.
But if there is not sell order in place, then the broker is free to loan them out to someone else.
the problem is when someone does a "short" order, and doesn't actually own the stock, or have the stock in their possesion at the time. Naked short selling, that's called. And if they fail to deliver the short shares they are supposed to - then the price of the stock can get hammered.
There are even stories now floating around of fake stock certificates-conterfieting- short shares being more than 100% of the entire outstanding stock.
I'll see if I can track one of those stories down -= and post it here.
