When you borrow stock from another person's stock portfolio?

Question

What do you accomplish from borrowing some one else's stock if you have to return it ? Wouldn't that require for you to buy the stock at whatever price it is on the market ? And while you have their stock, don't they miss out on the profit it might be making while you have it ? Don't they mind ?

Are you returning their stock with no change in price or reflecting the current market price of the stock or simply returning the stock?

Answer 1

I assume that your question relates to selling stock short. You are actually selling the stock at market price in the hope that the price of the stock will go down.  Then you would buy it back at a profit. The broker "borrows" the stock for you to sell.

Answer 2

The most common reason to borrow stock is to sell it short.  You think the price will go down, so you borrow stock and sell it now.  Later on, you hope to buy it in the market at a cheaper price, in order to close out the loan.  If the price goes down, you make a profit.  If the price goes up, you lose.  It's the basic formula of "buy low, sell high", except you sell high now, and hope to buy low in the near future.

When you borrow stock, you have to put up some kind of collateral, which is what gives the lender security that they will get their stock back.  If you put up cash as collateral, the lender has to pay you interest--usually at a pretty low rate.  From lender's point of view, you could say that they are borrowing cash from you, and using their stock as collateral.

No, the lender will not miss out on any profit.  First off, if they need to sell, they can always call the loaned shares back (if you are the borrower and this happens, you will have to find another source for the stock, or else close out your short position--but your broker can arrange all of this for you).  Second, the lender has the right to any dividends paid on their loaned-out shares.  If you borrow shares and they pay a dividend, you have to give the money to the lender.  Again, your broker should deal with the mechanics.

When you return the stock, you get your collateral back, plus any interest that accrued.  There is no market fluctuation involved.

Hope it helps.