As it is known that brokerage firms can borrow stocks from the accounts of their own customers. Typical margin account agreements give brokerage firms the right to borrow customer shares without notifying the customer. However, which side benefits from this arrangement?
Who benefits when brokerage firms borrow stocks from the accounts of their customers— the firm or the customers from whose account the stocks were borrowed?
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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 to. 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— who has the stocks. So, any benefit received along with any risk belongs to the brokerage firm. The broker does receive an amount of interest for lending out the shares and is also paid a commission for providing this service. In the event that the short seller is unable to return the shares they borrowed, the broker is responsible for returning the borrowed shares. While this is not a huge risk to the brokerage firm due to margin requirements, the risk of loss is still there, and this is why the broker receives the interest on the loan, just the way the whole risk of short selling is on them.
The act of lending out a customers stocks by a brokerage firm is called shorting stock, and lol profits made from it goes to the brokerage firm.
The main reason why the brokerage, and not the individual holding the shares, receives the benefits of loaning shares in a short sale transaction can be found in the terms of the margin account agreement. When a client opens a margin account, there is usually a clause in the contract that states that the broker is authorized to lend—either to itself or to others—any securities held by the client. By signing this agreement, the client forgoes any future benefit of having their shares lent out to other parties.
When you short sell a stock, the broker will lend it to you. The stock will come from the brokerage’s own inventory, from another one of the firm’s customers, or from another brokerage firm. Sooner or later you must close the short by buying back the same number of shares and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, you have to buy it back at the higher price, and you lose money.
Most of the time, you can hold a short for as long as you want. However, borrower can be forced to cover if the lender wants back the stock they borrowed.