Please explain stock short selling to me.

[gazpacho]

@UncleFred

I follow this but would also like to know; What is the mechanism whereby one ‘borrows’ a stock? I know how to buy or sell a stock; I call a broker or do it myself via etrade or something like that. But how does one do a ‘loan’?

You set up a margin account with etrade. Once you have the margin account you can sell stock you do not own. You are borrowing it from etrade. The following is from etrade FAQ on margin accounts.

Once your account is approved for margin trading, you don’t need to place any special orders or give us any special instructions to place a trade on margin. Just follow the steps you would to place the same trade in a cash account. (To place a stock trade on margin, see Place a stock order for step-by-step instructions.)

If you have $2,000 cash in your account, and place an order to buy $3,000 of a marginable security, the $2,000 will be placed against the amount of the trade, and you’ll effectively borrow the difference ($1,000) on margin.

When you place a buy order for marginable securities, the full amount of the trade ($3,000 in the above example) will initially show as a margin debit. Any and all funds in your account will be “swept” against the amount of this debit at the time the trade settles (for stocks, the third business day following the day of execution). We’ll use all available cash and money market funds in your account before we’ll begin charging you interest on any outstanding debit.

Conversely, any marginable securities you sell in your account will show initially as a margin credit until the trade settles.

https://us.etrade.com/e/t/estation/help?id=1302000000#Place

[newcomer]

@UncleFred

I follow this but would also like to know; What is the mechanism whereby one ‘borrows’ a stock?

Mechanism is a margin account (as opposed to cash account) where you put a predetermined percentage of security value in cash (a % of security purchase price) and brokerage firm “lends” you the rest (for cash account you have to have 100% of the security purchase price).

From the brokerage firm perspective, it’s like a loan that is fully collateralized.