> - If I keep the stock, and borrow against it, I pay no taxes, but I do pay finance fees (e.g. interest). The finance fees work out to less than taxes.
I'm not following the whole lifecycle. You borrow against your stock, spend that money, and then repay the loan using stock? Without having technically sold the stock?
> If person A borrows a stock from person B then sells it to person C, they can borrow the stock back from person C and sell it again. No naked short involved.
Naive question: Why would that ever happen? Wouldn't this scenario just cost person C commissions with no opportunity for gain?
I assume they borrow against the after-tax value of the stock, because it will be taxed before being paid back(?) I don't know if that is significant, but I figure it's worth noting.
> If instead my money is “borrowed” without my concent for some nefarious activity
You give stock borrow consent when you sign up for a brokerage account. It’s also trivial to turn off, though there isn’t an informed reason for non-activist investors to do this. Some brokers share stock loan income with the account holder, though most keep it from retail accounts.
> What if the lender decided to sell the stocks that he had lent out?
The answer depends on the agreement between the lender and the borrower.
Suppose that I loan you my car and then decide to sell it. One possibility is that my agreement with you doesn't let me sell it (or forces me to come up with another car for you if I do). Another possibility is that my agreement with you says that the loan to you ends if I decide to sell.
Short selling is a form of borrowing. The only odd thing is that the thing that you have to repay isn't cash.
Consider a mortgage. The borrower rarely has enough money to cover the whole loan when it is taken out. Instead, the borrower hopes to have enough money to cover each payment as it occurs.
> The 'A shorts to B who shorts to C' type arrangement is unlikely in the extreme. Would B keep paying A for the borrow (and have the collateral tied up) if they have passed the stock to C? Nope, they'd return it...
I think you might've misunderstood the explanation. In Matt Levine's example, A lends to C, who sells to D, who lends to E, who sells to F. B can't just return the shares to A because they've sold them, and they aren't just going buy them back because the whole point is that they want to be short.
You don't repay the loan using stock. You repay it with cash from other sources (possibly thrown off by the new investment) or you keep the loan open and continue to pay interest on it.
I'm not following the whole lifecycle. You borrow against your stock, spend that money, and then repay the loan using stock? Without having technically sold the stock?
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