In reference to my recent posts on the dueling MLM moguls and their diversity minions, I have a question: how does short selling work?
I know the textbook answer: short-selling means “borrowing” stock and selling it, hoping the price goes down so it can be re-purchased at a lower price and returned to its owner. But . . . what does it mean to “borrow” a stock? Or more precisely, why would anyone “lend” me their stock? I assume the lender charges some kind of rent for his loaned stock and a fixed lease time, but is that correct? And why would I be enthusiastic about lending stock to someone so he can “bet” on a price decrease? Especially (as in this case) when the short-seller is politically connected, and might be able to drive the price down irrespective of the stock’s value fundamentals, during which time I can’t sell it myself because I’ve loaned it out!
And why, as a regulatory matter, do we allow short-selling in the first place. I get that, in theory at least, speculators aid in price discovery. But short-selling is something beyond that, and it’s not really clear how it adds value to the market.
I would be grateful to anyone who can answer these questions.