How does delisting affect shorted stock?

Posted Feb 17, 2005 18:13 UTC (Thu) by iabervon (subscriber, #722) [Link]

Essentially, in order to sell stock short, you have to find someone willing to hold onto that amount of stock who is willing to sell it to you at the given time for a huge amount of money if necessary. Otherwise, the market risks there being a time when your shorted stock comes due and the total amount offered for sale is less than your obligation, in which case it wouldn't be possible to fulfill the requirements, regardless of money (since there's a limited amount of stock total, and not all owners are entertaining offers at all at any particular time). Note that the amount you can short is limited by the amount in reserve for covering shorts, not the amount on the market, because the stock on the market can be bought and held by people not paying attention.

What happened with SCO towards the beginning is that it was sufficiently shorted that it couldn't be shorted any more. In fact, SCOX later went up precipitously at times, when the shorts came due and there wasn't enough stock on the market to cover them at the market price. The issue isn't really that you aren't allowed to short bad stock, but you can't short the same thing that everybody else is shorting, or things that brokers aren't holding for this purpose.

Posted Feb 17, 2005 18:36 UTC (Thu) by jwb (guest, #15467) [Link]

Most retail brokerages have strict rules about shorting. For example many of them will not allow you to short a stock with a share price under $5. These rules are mainly in place to protect the broker from lawsuits. The online retail brokerages are a kind of padded kindergarten playground for investors. You can have a little fun, but it's not really dangerous.