Borrowed stock involves stocks that are considered to be part of a short sale. Usually, the seller chooses to take the borrowed stock on a loan basis from a broker, then sells the stock on the open market. The idea behind marketing borrowed stock is to ultimately pay a lower price per share for the stock that is on loan, while selling the stock at a greater price.
Short sellers do operate with an understanding that dealing with borrowed stock includes a degree of risk. Because the stock market can and does occasionally take an unexpected turn, there is always the possibility that the quoted price extended by the broker for the borrowed stock will be higher than the price that the short seller can secure for the final sale of the stock. When this happens, it is the short seller who must absorb the loss, rather than the buyer or the broker.
More often, however, short sales conducted with borrowed stock can prove to be a steady means of generating revenue. By paying close attention to the historical performance of the stock in question, it is possible to create arrangements with brokers that result in revenue for both parties. The ideal arrangement is a price that is acceptable to the broker and also low enough to provide the seller with a good chance finding a buyer who will pay a good price for the stock. When the market holds true to projected performance, and the seller can find a buyer willing to pay a price that covers the broker rate and also generates a profit, the deal becomes lucrative for all concerned parties.
While the returns with borrowed stock are not always spectacular, an investor with a knack for short selling can identify stock options that are likely to produce enough profit to justify the time and resources used to broker the deal and find the right buyer. Because the turnaround time for securing and selling borrowed stock is a relatively short one, sellers can quickly complete the process and move on to another deal.