Unborrowable stock

DEFINITION of unborrowable stock

The unborrowable stock is the stock that no one wants to lend out to short sellers.

WHAT IT IS IN ESSENCE

When shares in a company become unborrowable, the traditional way of short selling them become impossible.

Short selling a stock means to find someone in the market who wants to lend an stock to some trader. And then buy it back when the trader closes the position. Usually, finding short selling opportunities is the job of broker, who will pass the owner’s borrowing costs on to trader.

Short selling can depress a share’s price on the market, and even bring about a bear market.

Shares don’t fall in price because of bear raiding. They fall due to a lack of “buying support”. So you could have a collapse in a share price without anyone short selling it just because no one will buy it. And prices keep declining until support is found. You could also have someone trying to short sell up to the maximum number of shares allowed but find price goes up because a lot of people are still buying.

HOW TO USE

Shorting is much riskier than buying stocks, or what’s known as taking a long position. When you buy shares of the company, you obviously hope they will rise in the short term or over a long period or maybe that they will just provide dividend income.

When you “go long,” your maximum possible loss is 100% or your entire initial investment. That can happen, for example, if a company goes bankrupt.

But if you have a short position, there’s no limit to how much money you can lose if the shares rise. If the share price increases soon after you place a short position, you could quickly “cover” by buying back the shares and returning them to the investor you borrowed them from. If you’re lucky, you might not lose very much.

For this reason, the broker may find it impossible to find a lender for a particular stock. In this instance, the stock has become unborrowable.