Fidelity: Bro, can we borrow some of your shares? Since when are they even asking??
(media.greatawakening.win)
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When they short a stock you own while using your shares, sometimes it's not being shorted because it's overpriced. It's a way to destroy a company they oppose. In the event of great news for the shorted company, the price can Gap up in price which puts shortie in a position when he has to actually buy the stock to cover his contract. That can cause even bigger price increases as the new Cadre of buyers jump in. That can cause a "short squeeze" where the price goes up more. Shortie now has to buy a stock that has gone up double, triple, or more. Shortie doesn't have the funds to cover. He also signed a contract offering your shares to someone else. You decide to sell at the spike in price. The broker doesn't have the funds to get your shares back. Broker goes bankrupt. You are now broke.
If it was only that simple.
You failed to mention so, so many factors that I'm not sure where to start.
Shorting a stock requires margin. The margin required is 100% of the shorted stock in addition to, at the very least, 25% above that amount called "margin requirement". Many brokerage firms require even more than that which regulation requires. At any point if your margin requirement is not met in the period a stock is being shorted you fall into what's called a 'margin call'. The firm gives the person shorting the stock a few hours to cover that margin call therefore bringing that investor back in line with the 125% requirement by force. If the investor shorting the stock does not meet that requirement, the firm liquidates the investors positions, whether it be the shorted stock or any other stock in his/her portfolio, in order to bring it back in line.
The above mentioned is a core and regulated feature of a margin account that allows the shorting of stocks.
That being said lets also not forget what the main motivation of a person shorting the stock is.
It is NOT to eventually own a declining position. In fact he/she is likely not even interesting in owning a stock at all. A person shorting a stock is motivated only in making money on the delta between the current market price and the price at which the short position was taken. That's it.
To that end. A short position is rarely if ever trading hands. The delta is the only thing moving between the investors. The person caught on the losing end gets out from under the position and the difference in dollars is then transferred to the investor on the winning side. The person that originally owned the stocks being shorted has always and continues to own the shares.
Keep in mind the person taking the short end of the contract NEVER had faith in the stock he or she shorted. By definition. Therefore never wanted the stock. The investor is attempting to capitalize on what he/she perceived as a miscalculation by owner of the stock that is being shorted. The owner of the stock being shorted is motivated by the inverse.
The firm on the other hand is motivated by making money on the facilitation of that transaction. The firm charges 'margin interest'. If the firm, in its calculation, is taking on too much risk in the facilitation of that transaction the firm simply liquidates the transaction and forces the loser to make good on that transaction. And since the margin requirement, at all times, was at or above the 125% requirement, all parties in the transaction are covered. Including the firm.
None of what I mentioned above should be taken as advice.