CFM6000a - Taxing loan relationships: repo and stock lending: introduction
Overview: short position
A short position arises where someone has sold stock that they don't own because they expect to buy it at a lower price in time for delivery. A seller can 'sell short' because settlement of deals takes place between one and three days after the deal is agreed.
Example 1
AC Ltd agrees to sell stock to JK Ltd for £10,000 on Monday, with delivery on Wednesday. If AC Ltd has read the market right, it could buy the stock on Tuesday or Wednesday for less than £10,000.
Using repo and stock loans
By 'borrowing' stock through repo or stock loans, the seller can string things out even further.
Example 2
If AC Ltd thinks that the price may fall even further, it may delay its purchase and obtain the stock for JK Ltd by way of repo or stock loan. In this way it won’t need to buy the stock outright until the time comes to return the repo or stock loan.
