Unborrowable stock

Unborrowable stock

There are several stocks that cannot be borrowed, so short selling is not possible. For example, unborrowable stocks include those not registered with the SEC, illiquid ones, or those having special restrictions. For these stocks, short selling is not possible. 

Traditional short selling has one important drawback: it relies on the broker’s assurance that they have assets to lend you, which is not always true, especially during extremely volatile market conditions. Additionally, you could come across “unborrowable stocks”—assets that, for various reasons, no broker is prepared to lend you—forcing you to rethink or quit your existing approach. 

What is an unborrowable stock? 

A stock that no one is willing to lend to short-sellers is said to be unborrowable. 

Finding a market participant willing to lend you the stock and then buy it back from you once your position is closed is the classic method of short-selling. When this procedure fails, the stock can no longer be borrowed, which gives rise to the term “unborrowable stock”. 

Understanding unborrowable stock 

Locating short-selling possibilities typically falls to your broker, who might subsequently charge you for the owner’s borrowing expenses. However, shorting shares on the market can lower share prices and potentially trigger a bear market.  

The lender of your shares would continue to hold a long position in the stock, so if there is a significant amount of short interest, they may begin to remove their shares from the market. If your broker cannot locate a lender for this specific stock, it may have lost its ability to be borrowed against. 

The conventional method of shorting shares becomes difficult when a company’s shares become unborrowable. As you are not selling the shares but rather betting on price changes, using CFDs for short-selling might provide you with a far more flexible shorting technique. 

How to use unborrowable stock? 

If you’re a short seller, you may find yourself in a predicament when you can’t borrow the stock you need to sell short. When this happens, you may be tempted to use an unborrowable stock. However, this is a risky move and should only be done as a last resort. 

If you decide to use an unborrowable stock, you must be extra careful. Make sure you have a solid plan and are prepared to lose money if the stock price goes against you. Remember, you’re not just gambling with your own money but with the money of the person who lent you the stock. So be smart and be safe. 

Essence of unborrowable stock 

Brokerage firms cannot loan out certain stocks due to regulatory reasons. These are typically unborrowed stocks and tend to be volatile and illiquid. However, some investors believe these stocks may be undervalued and offer profit potential. Due to the lack of liquidity, unborrowed stocks may be more difficult to sell, and investors should be aware of the risks before investing. 

Example of an unborrowable stock 

The following is an example of an unborrowable stock: 

Suppose you decide to short 100 shares of XYZ Company. Your position can now be opened thanks to your broker’s discovery of another investor with a long position in 100 shares of XYZ who is willing to lend you the shares for a short sale. Your prediction came true after a few weeks, and the stock price fell. Your lender’s shares are no longer available to you because they have decided to close their long position for a loss in response to the pressure from short sellers. The shares have become “unborrowable,” thus you are compelled to close your position and return them to them. 

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