Short selling question
Posted: September 10th, 2018, 4:04 pm
I have been wondering about a detail in my understanding of short selling. As I understand it:-
Person A wants to short the shares in XYZ plc. They borrow the shares from Person B, pay them a fee for the privilege of borrowing and then sell the shares. Assuming the price of the shares go down, Person A buys back the shares at the lower price, making a profit on the price difference. So far, so good. However, Person A now gives the shares back to Person B who ends up with a holding in XYZ plc that is worth less, possibly a lot less, than it was before the shares were lent to Person A.
How does Person B benefit from this apart from the borrowing fee which must be less than the before and after price difference? ('m working on the assumption that Person A wouldn't borrow the shares and pay a borrowing fee if they didn't think they could make a profit bigger than the cost of the borrowing fee.)
All enlightenment gratefully received.
Person A wants to short the shares in XYZ plc. They borrow the shares from Person B, pay them a fee for the privilege of borrowing and then sell the shares. Assuming the price of the shares go down, Person A buys back the shares at the lower price, making a profit on the price difference. So far, so good. However, Person A now gives the shares back to Person B who ends up with a holding in XYZ plc that is worth less, possibly a lot less, than it was before the shares were lent to Person A.
How does Person B benefit from this apart from the borrowing fee which must be less than the before and after price difference? ('m working on the assumption that Person A wouldn't borrow the shares and pay a borrowing fee if they didn't think they could make a profit bigger than the cost of the borrowing fee.)
All enlightenment gratefully received.