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Thanks, this is exactly what I was looking for. I'm also glad, that I am not the only one confused about this type of trade.

What if the lender decided to sell the stocks that he had lent out? Would the trade need to be closed for the short seller, or would he have to repay immediately and short sell a new lenders stock?

It depends on where the shares were borrowed from.

Either they were borrowed from the brokerage firms inventory or they were borrowed on margin from another clients account. If they're borrowed from the firms inventory, it's unlikely the short seller will be affected, because the firm will just have you borrow against different shares in their same pool of inventory. If they have no more left, they can borrow from another firm. In the very unlikely scenario that the firm decides to not hold ANY more shares of that company, then you may get called on the stock.

In the second scenario, if you're borrowing from another client, however, you may be at risk of getting a margin call -- in which case you would need to purchase the shares on the open market at their current price and return them to the lender.

So if you get called, you have to get them back to the lender...

> What if the lender decided to sell the stocks that he had lent out?

The answer depends on the agreement between the lender and the borrower.

Suppose that I loan you my car and then decide to sell it. One possibility is that my agreement with you doesn't let me sell it (or forces me to come up with another car for you if I do). Another possibility is that my agreement with you says that the loan to you ends if I decide to sell.

Short selling is a form of borrowing. The only odd thing is that the thing that you have to repay isn't cash.

Consider a mortgage. The borrower rarely has enough money to cover the whole loan when it is taken out. Instead, the borrower hopes to have enough money to cover each payment as it occurs.

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