Short selling

Some of the strategies exploiting arbitrage opportunities require short selling. This trade involves selling assets that the investor does not own. It is carried out using the following steps:

1. The customers broker borrows the securities from another investor and sells them in the usual way in the market.

2. At some point in the future, the short seller has to buy the securities at the market price of that time, in order to replace them in the other clients account.

3. The short seller has the obligation to pay all dividends and other benefits to the owner of the securities that have been borrowed.

It is obvious that short selling requires an agreement --formal or informal, between an investor and her broker. What happens if short selling is not possible? It follows that it does not make any difference, if we make the assumption that there is a fairly large number of people that hold the assets for investment purposes. If there is an arbitrage opportunity, then the holder of the asset will exploit it himself and make a riskless profit, rather than lending the securities to someone else to do so.