Notes on Short selling .docx - Foundations of Finance Who Benefits from Loaning Shares in a Short Sale When a trader wishes to take a short position he

Notes on Short selling .docx - Foundations of Finance Who...

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Foundations of Finance Who Benefits from Loaning Shares in a Short Sale? When a trader wishes to take a short position, he or she borrows the shares from a broker without knowing where the shares come from or to whom they belong. The borrowed shares may be coming out of another trader's margin account , out of the shares being held in the broker's inventory, or even from another brokerage firm. It is important to note that, once the transaction has been placed, the broker is the party doing the lending and not the individual investor. So, any benefit received (along with any risk) belongs to the broker. Benefits from Loaning Shares As your question suggests, the broker does receive an amount of interest for lending out the shares, and it is also paid a commission for providing this service. In the event that the short seller is unable (due to a bankruptcy, for example) to return the shares he or she borrowed, the broker is responsible for returning the borrowed shares.
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