What does it mean when the broker does not have enough shares to short?
For Canada No distinction is made in the regulation between “naked” or “covered” short sales. However, the practice of “naked” short selling, while not specifically enumerated or proscribed as such, may violate other provisions of securities legislation or self-regulatory organization rules where the transaction fails to settle. Specifically, section 126.1 of the Securities Act prohibits activities that result or contribute “to a misleading appearance of trading activity in, or an artificial price for, a security or derivative of a security” or that perpetrate a fraud on any person or company. Part 3 of National Instrument 23-101 Trading Rules contains similar prohibitions against manipulation and fraud, although a person or company that complies with similar requirements established by a recognized exchange, quotation and trade reporting system or regulation services provider is exempt from their application. Under section 127(1) of the Securities Act, the OSC also has a “public interest jurisdiction” to make a wide range of orders that, in its opinion, are in the public interest in light of the purposes of the Securities Act (notwithstanding that the subject activity is not specifically proscribed by legislation). The TSX Rule Book also imposes certain obligations on its “participating organizations” in connection with trades that fail to settle (see, for example, Rule 5-301 Buy-Ins).  In other words, shares must be located by the broker before they can be sold short. A share may not be locatable because there are none available in the broker's inventory, that it cannot lend more than what it has on the books for trade.  A share may not be available because the interest rate that brokers are charging to borrow the share is considered too high by that broker, usually if it doesn't pass on borrowing costs to the customer.  There could be other reasons as well. If one broker doesn't have inventory, another might.  I recommend checking in on IB's list.  If they can't get it, my guess would be that no one can since IB passes on the cost to finance short sales.
"If you can't find anyone to lend you the shares, then you can't short. You can attempt to raise the interest rate at which you will borrow at, in order to entice others to lend you their shares. In practice, broadcasting this information is pretty convoluted. If there aren't any stocks for you to buy back, then you have to buy back at a higher price. As in, place a limit buy order higher and higher until someone decides to sell to you. This affects your profit. Regarding the public ledger: This functions different in different markets. United States stock markets have an evolving body of regulations to alleviate the exact concerns you detailed, but Canada's or Dubai's stock markets would have different provisions. You make the assumption that it is an efficient process, but it is not and it is indeed ripe for abuse. In US stocks, the public ledger has a 3 business day delay between showing change of ownership. Many times brokers and clearing firms and other market participants allow a customer to go short with fake shares, with the idea that they will find real shares within the 3 business day time period to cover the position. During the time period that there is no real shares hitting the market, this is called a ""naked short"". The only legal system that attempts to deter this practice is the ""fail to deliver"" (FTD) list. If someone fails to deliver, that means there is a short position active with fake shares for which no real shares have been borrowed against. Too many FTD's allow for a short selling restriction to be placed, meaning nobody else can be short, and existing short sellers may be forced to cover." It depends on your cost structure and knowledge of the exchanges. It could be optimal to make a manual exchange selection so long as it's cheaper to do so. For brokers with trade fees, this is a lost cause because the cost of the trade is already so high that auto routing will be no cheaper than manual routing. For brokers who charge extra to manually route, this could be a good policy if the exchange chosen has very high rebates.  This does not apply to equities because they are so cheap, but there are still a few expensive option exchanges. This all presumes that one's broker shares exchange rebates which nearly all do not. If one has direct access to the exchanges, they are presumably doing this already. To do this effectively, one needs: For anyone trading with brokers without shared rebates or who does not have knowledge of the exchange prices and their liquidities, it's best to auto route. Michael gave a good answer describing the transaction but I wanted to follow up on your questions about the lender. First, the lender does charge interest on the borrowed securities. The amount of interest can vary based on a number of factors, such as who is borrowing, how much are they borrowing, and what stock are they trying to borrow.  Occasionally when you are trying to short a stock you will get an error that it is hard to borrow. This could be for a few reasons, such as there are already a large amount of people who have shorted your broker's shares, or your broker never acquired the shares to begin with (which usually only happens on very small stocks). In both cases the broker/lender doesnt have enough shares and may be unwilling to get more. In that way they are discriminating on what they lend. If a company is about to go bankrupt and a lender doesnt have any more shares to lend out, it is unlikely they will purchase more as they stand to lose a lot and gain very little.  It might seem like lending is a risky business but think of it as occurring over decades and not months. General Motors had been around for 100 years before it went bankrupt, so any lender who had owned and been lending out GM shares for a fraction of that time likely still profited.  Also this is all very simplified. JoeTaxpayer alluded to this in the comments but in actuality who is lending stock or even who owns stock is much more complicated and probably doesnt need to be explained here. I just wanted to show in this over-simplified explanation that lending is not as risky as it may first seem. "Being ""Long"" something means you own it.  Being ""Short"" something means you have created an obligation that you have sold to someone else.  If I am long 100 shares of MSFT, that means that I possess 100 shares of MSFT.  If I am short 100 shares of MSFT, that means that my broker let me borrow 100 shares of MSFT, and I chose to sell them.  While I am short 100 shares of MSFT, I owe 100 shares of MSFT to my broker whenever he demands them back.  Until he demands them back, I owe interest on the value of those 100 shares.  You short a stock when you feel it is about to drop in price.  The idea there is that if MSFT is at $50 and I short it, I borrow 100 shares from my broker and sell for $5000.  If MSFT falls to $48 the next day, I buy back the 100 shares and give them back to my broker.  I pocket the difference ($50 - $48 = $2/share x 100 shares = $200), minus interest owed.  Call and Put options.  People manage the risk of owning a stock or speculate on the future move of a stock by buying and selling calls and puts.  Call and Put options have 3 important components.  The stock symbol they are actionable against (MSFT in this case), the ""strike price"" - $52 in this case, and an expiration, June.  If you buy a MSFT June $52 Call, you are buying the right to purchase MSFT stock before June options expiration (3rd Saturday of the month).  They are priced per share (let's say this one cost $0.10/share), and sold in 100 share blocks called a ""contract"".  If you buy 1 MSFT June $52 call in this scenario, it would cost you 100 shares x $0.10/share = $10.  If you own this call and the stock spikes to $56 before June, you may exercise your right to purchase this stock (for $52), then immediately sell the stock (at the current price of $56) for a profit of $4 / share ($400 in this case), minus commissions.  This is an overly simplified view of this transaction, as this rarely happens, but I have explained it so you understand the value of the option.  Typically the exercise of the option is not used, but the option is sold to another party for an equivalent value.  You can also sell a Call.  Let's say you own 100 shares of MSFT and you would like to make an extra $0.10 a share because you DON'T think the stock price will be up to $52/share by the end of June.  So you go to your online brokerage and sell one contract, and receive the $0.10 premium per share, being $10.  If the end of June comes and nobody exercises the option you sold, you get to keep the $10 as pure profit (minus commission)!  If they do exercise their option, your broker makes you sell your 100 shares of MSFT to that party for the $52 price.  If the stock shot up to $56, you don't get to gain from that price move, as you have already committed to selling it to somebody at the $52 price.  Again, this exercise scenario is overly simplified, but you should understand the process.  A Put is the opposite of a Call.  If you own 100 shares of MSFT, and you fear a fall in price, you may buy a PUT with a strike price at your threshold of pain.  You might buy a $48 June MSFT Put because you fear the stock falling before June.  If the stock does fall below the $48, you are guaranteed that somebody will buy yours at $48, limiting your loss.  You will have paid a premium for this right (maybe $0.52/share for example).  If the stock never gets down to $48 at the end of June, your option to sell is then worthless, as who would sell their stock at $48 when the market will pay you more?  Owning a Put can be treated like owning insurance on the stock from a loss in stock price.  Alternatively, if you think there is no way possible it will get down to $48 before the end of June, you may SELL a $48 MSFT June Put.  HOWEVER, if the stock does dip down below $48, somebody will exercise their option and force you to buy their stock for $48.  Imagine a scenario that MSFT drops to $30 on some drastically terrible news.  While everybody else may buy the stock at $30, you are obligated to buy shares for $48.  Not good!  When you sold the option, somebody paid you a premium for buying that right from you.  Often times you will always keep this premium.  Sometimes though, you will have to buy a stock at a steep price compared to market.  Now options strategies are combinations of buying and selling calls and puts on the same stock.  Example -- I could buy a $52 MSFT June Call, and sell a $55 MSFT June Call.  I would pay money for the $52 Call that I am long, and receive money for the $55 Call that I am short.  The money I receive from the short $55 Call helps offset the cost of buying the $52 Call.  If the stock were to go up, I would enjoy the profit within in $52-$55 range, essentially, maxing out my profit at $3/share - what the long/short call spread cost me.  There are dozens of strategies of mixing and matching long and short calls and puts depending on what you expect the stock to do, and what you want to profit or protect yourself from.  A derivative is any financial device that is derived from some other factor.  Options are one of the most simple types of derivatives.  The value of the option is derived from the real stock price.  Bingo?  That's a derivative.  Lotto?  That is also a derivative.  Power companies buy weather derivatives to hedge their energy requirements.  There are people selling derivatives based on the number of sunny days in Omaha.  Remember those calls and puts on stock prices?  There are people that sell calls and puts based on the number of sunny days in Omaha.  Sounds kind of ridiculous -- but now imagine that you are a solar power company that gets ""free"" electricity from the sun and they sell that to their customers.  On cloudy days, the solar power company is still on the hook to provide energy to their customers, but they must buy it from a more expensive source.  If they own the ""Sunny Days in Omaha"" derivative, they can make money for every cloudy day over the annual average, thus, hedging their obligation for providing more expensive electricity on cloudy days.  For that derivative to work, somebody in the derivative market puts a price on what he believes the odds are of too many cloudy days happening, and somebody who wants to protect his interests from an over abundance of cloudy days purchases this derivative.  The energy company buying this derivative has a known cost for the cost of the derivative and works this into their business model.  Knowing that they will be compensated for any excessive cloudy days allows them to stabilize their pricing and reduce their risk.  The person selling the derivative profits if the number of sunny days is higher than average.  The people selling these types of derivatives study the weather in order to make their offers appropriately.  This particular example is a fictitious one (I don't believe there is a derivative called ""Sunny days in Omaha""), but the concept is real, and the derivatives are based on anything from sunny days, to BLS unemployment statistics, to the apartment vacancy rate of NYC, to the cost of a gallon of milk in Maine.  For every situation, somebody is looking to protect themselves from something, and somebody else believes they can profit from it.  Now these examples are highly simplified, many derivatives are highly technical, comprised of multiple indicators as a part of its risk profile, and extremely difficult to explain.  These things might sound ridiculous, but if you ran a lemonade stand in Omaha, that sunny days derivative just might be your best friend..." You can't make money on the way down if it was your money that bought the shares when the market was up.  When you sell short, borrowing lets you tap into the value without paying for it. That way, when the price (hopefully) drops you profit from the difference. In your example, if you hadn't paid the £20 in the first place, then you would actually be up £5. But since you started with £20, you still show loss. As others said, borrowing is the definition of selling short. It is also simply the only way the math works. Of course, there is a large risk you must assume to enjoy benefiting from something you do not own! Why would a shareholder lend the investor the shares? Some brokers like IB will pay you to lend your shares: http://ibkb.interactivebrokers.com/node/1838 If you buy shares on margin, you don't have much of a choice. Your broker is allowed to lend your shares to short-sellers. Brokers have the right to charge interest on any stock that they lend you. Since you borrowed the TSLA to short it, the owner of those shares can charge you interest until you return them. If you are not getting charged interest on some shares that you have borrowed to short, consider it generosity on the part of the lender. "Summary: The phrase ""short sale circuit breaker"" rule normally refers to the SEC's recent adoption of a new version of the uptick rule. The new uptick rule triggers a ban on short selling when the stock drops a certain amount. The SEC defines the process like this: The ""circuit breaker"" is triggered for a security any day the price declines by 10% or more from the prior day's closing price The alternative uptick rule, which permits short selling only ""if the price of the security is above the current national best bid.""1 The rule applies ""to short sale orders in that security for the remainder of the day as well as the following day."" In general, the rule applies to all equities. 1) The national best bid is usually the bid price that you see in Level 1 data.   Example: If a stock closed at $100/share on Monday, the ""circuit breaker"" would be triggered if the stock traded at or below $90/share during Tuesday's session. Short-selling would be disallowed until the start of trading on Thursday unless the short-sell price is above the national best bid, i.e. on an uptick. Purpose: The stated purpose of this rule is promote market stability and preserve investor confidence by restricting potentially abusive short selling from driving prices farther downward during periods of increased volatility and downward price pressure. Whether or not such rules succeed is a matter of some debate, and the SEC removed similar uptick rules in 2006 because ""they modestly reduce liquidity and do not appear necessary to prevent manipulation."" Exceptions: There are a few exceptions to the uptick rule that mainly revolve around when the short sell order was placed or when the securities will be delivered."