I've been asked a question I can't answer!31 Jan 2021 10:03
My brother has been asking me all sorts of questions since the Gamestop situation went viral.
So I've been explaining it all and he's been lapping it up.
He then asked me about how shorting works and I was doing great up until he asked 'so, why would you loan out the shares you bought just for someone else to theoretically never give you those shares back?'
And it stumped me.
In our world for example, Goldman Sachs buys tens of millions of shares at a cost of millions.
- They lend the shares out to people who think Cine will fall
- If Cine goes bankrupt, those shares are worthless
- Goldman Sachs lose all the money they paid for them
So why lend them out?
Do they only lend on companies they think will come back eventually so it's extra income in the meantime through loan fees?
Cos otherwise it makes no sense and I couldn't provide an answer.
I know we're all just pretty much average joe's here but if anyone could explain the reasoning behind that, even if I'm missing the bleeding obvious, I'd be grateful!