Hey loobs - that's the basic concept, but generally the process is more like this:
1. The large institution 'lends' it's stock to Client A, and charges a negotiated premium for the agreed duration of the loan of stock. (Also, the Client generally has to remunerate the Insto with any dividends that are paid during the loan period)
2. Client A then takes the borrowed stock and sells it.
3. Client A waits until the share price falls (lets say 25%), and then re-buys the stock at the lower value.
4. Client A gives back the stock to the Insto, and takes it's 25% gains, less the negotiated premium paid.
Essentially there is no cash transferred between the Insto/Client, other than the premium charge.
It's a way for big Insto's to make money from their portfolio holdings that just sit there otherwise. For example UBS owns 8 to 9% of Acrux, probably in a Biotech fund. They can make money on their holdings just by owning it.
I spoke to my broker earlier in the year and I understand the process quite well now because I wanted to short stocks properly (and not through CFD's or Options).
However, one thing is certain, much like how stocks go up and eventually pull back - stocks also go down and also pullback. For shorters to redeem their profits, they essentially need to buy the stock. Acrux in the last 4 business days is the perfect example of what happens when shorts are 'covered'
ACR Price at posting:
$1.35 Sentiment: Buy Disclosure: Held
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