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27/01/16
10:47
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Originally posted by Mightyatom
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I add my support to hindmost's view. I never took hindmost's post to mean literally more shares are on issue. Of course that is not possible. I read it as separating the actual registry from trading activity.
Let's say I have 100,00o shares in company A and I am the only holder of shares.
* The market consists of zero shares on offer, off-market there are 100,000 shares held on registry
If my broker lends out those 100,000 shares to a hedge fraud then the market consists of
* 100,000 shares on registry off-market not for sale and 100,00 shares on market for sale.
The registry hasn't changed but there is now two entities with an interest in the same parcel of shares. Trading occurs where it wouldn't have otherwise.
There is effectively 200,000 shares out there (but not literally on the register) my legal right to shares purchased and held on a sub-registry holds true:
* My 100,000 shares that I still regard as my shares - in fact I don't know they have been loaned;
* and, some buyer of 100,000 shares who could well be a legitimate buyer with the same intent as me holding the shares indefinitely
That situation remains until the shares are returned (close the short) then it is status quo.
In my unrealistic simple example of one holder the shorter would be facing unlimited losses due to the new buyer not offering that 100k parcel for sale. Just thought I would add some dramatics with a simple unrealistic illustration to encourage the 'shorter burns' comments.
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Mighty, you have it wrong. It's true derivative product can increase total amount of risk associated with sp beyond that implied in number of issued shares.
But in your example, your shares have been sold. Ownership has passed. If your broker did not take adequate risk management measures (ie mark to market security) for the call option, I can assure you that you would likely never get them back if sp went up enough.