Originally Posted by
KW
In order to short a stock, that is selling a share you do not own, you have to "borrow" the shares from someone who does own them, so that you can deliver them to the buyer. EVERY SHORT SELLER MUST BORROW THE SHARES. This is called a Covered Short, and is the only way you can short stocks since the post GFC regulations made Naked Shorts (selling a share and buying it back before delivery of the original sold shares can be made) illegal.
It is of course legal everywhere since it is a basic part of the market mechanics.
the shares are not returned to the lender at a higher price, the lender simply gets interest on the value of the shares loaned for so long as the short seller of them takes before buying them back and returning them. This is usually a short period of time, as if the share price is falling, you pay back the "loan" and borrow them again at the cheaper market price.
I can make the shares i own available through my broker to cover short sellers. Its not just fund managers who can do it, anyone can. If one were planning on holding shares through a correction, its an easy way to make money (assuming that the share price will eventually recover and you arent contributing to your own loss of capital)