Short Selling WTF

[canta_brian]

https://www.cityam.com/thomas-cook-coll ... -millions/

I genuinely don't get it. For me it works like this.

I have a nice new SUV
A person, lets say this person is a famous Paris to Dakar rally driver, offers me £3000 to borrow my car for a month.
I say, blimey that's a lot of money. What could possibly go wrong?
In 1 month I moan about sand in my footwells at the lower end of moaning, or in Thomas Cook's case i moan that by the time my car was returned it was worthless.

The people lending the shares to hedge funds must know that they are going to get shares back that have depreciated far more than the fees paid to them. Why do they do it?

[Digby]

Total income for stock lending could well outweigh losses on a particular asset dropping in value, and often it's not the same business department deciding to hold a stock and those doing the lending , and both are supposed to return revenues. If I ran a stock lending operation I wouldn't be worried about falling market values, tbh something like a rights issue would give me more pause for thought as that's more work in my life

[Son of Mathonwy]

https://www.cityam.com/thomas-cook-coll ... -millions/

I genuinely don't get it. For me it works like this.

I have a nice new SUV
A person, lets say this person is a famous Paris to Dakar rally driver, offers me £3000 to borrow my car for a month.
I say, blimey that's a lot of money. What could possibly go wrong?
In 1 month I moan about sand in my footwells at the lower end of moaning, or in Thomas Cook's case i moan that by the time my car was returned it was worthless.

The people lending the shares to hedge funds must know that they are going to get shares back that have depreciated far more than the fees paid to them. Why do they do it?

It's still a gamble. If it's well known that a company is in trouble, their share price will aready be low. The short-seller is gambling that it will fall even lower. If he's wrong (eg say the company was rescued somehow or even that is merely seems more likely that it will be in the near future), then the price would rise and he would lose (ie he would have to pay more for the shares than he sold them for).

(Not that I'm supporting short-selling. It's the kind of practice (like derivatives) which turns Stock Exchanges into casinos rather than places to raise funds for legitimate business purposes.)

I think you need to ditch the rally from your example. The disaster about to befall your car needs to be something that cannot be avoided, whoever has the car over the weekend. Say, there's a report pending on that model that will decide whether it can legally be driven on the roads. This will make the value of the car much lower than its original price. Someone pays you a small amount of money to borrow it (they will return it or an identical car). You have the option to sell the car instead, but it's at such a low price at the moment you decide to risk holding onto it. At the end of the weekend you get the car back (or an identical one), but the value of it depends not on what was done to it, but what the report says. If the report is bad then the car is worthless (but it would have been regardless of whether you lent it to someone for the weekend) and if the report is good, well done, you were right not to sell.