Something I never understood, Short Selling...
Something I never understood, Short Selling...
Ok, I understand it's been part of the "market" for a long time, but to me Common sense says it should be Illegal to begin with, I mean If I went out and sold something I didn't own, I'd probably be in Jail..
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kabalman2000
- Sorcerer
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- Joined: Sun May 27, 2007 5:43 pm
Re: Something I never understood, Short Selling...
Hmmm ... as I recall it works sort of like this:
You enter into a contract to sell someone stock in a company for a specific price at a specific time in the future. Generally this will be for less than the stock is trading for currently. You hope that between now and the contract due date the stock will fall below the price you agreed to sell it at. You buy the stock at the lower price and sell it at the contract price; the difference being your profit.
So, you've never actually sold anything you didn't own; you agreed to acquire something and sell it to someone.
(I think there was another way where you borrowed someone's stock and agreed to replace it in the future. You sell it today and hope you can regain the stock for less before you have to replace it. Same difference.)
The person on the other end of the contract is speculating that the price will go up before he has to buy the stock from you. He could then immediately sell the stock for a profit.
This leads to an interesting situation in which both parties can profit on the same contract, just not by as much as either could have. Stock XYZ is selling for $10. Party A contracts to sell the stock for $9 to party B 30 days in the future. In 15 days the stock has dropped to $5 and party A buys it looking to make $4 on the sale to B. In 30 days the stock has rebounded to $13 and party B buys the contract stock and sells it making $4.
Both parties could also lose. Same contract but at 15 days XYZ makes an announcement that send prices soaring to $13 and it looks like it's going nowhere but up. Party A buys the stock to minimize loss to $4. At 29 days a major problem is found and the stock drops to $5 and looks to be going nowhere but down. Party B fulfills the contract and sells losing $4.
Isn't gambling wonderful?
You enter into a contract to sell someone stock in a company for a specific price at a specific time in the future. Generally this will be for less than the stock is trading for currently. You hope that between now and the contract due date the stock will fall below the price you agreed to sell it at. You buy the stock at the lower price and sell it at the contract price; the difference being your profit.
So, you've never actually sold anything you didn't own; you agreed to acquire something and sell it to someone.
(I think there was another way where you borrowed someone's stock and agreed to replace it in the future. You sell it today and hope you can regain the stock for less before you have to replace it. Same difference.)
The person on the other end of the contract is speculating that the price will go up before he has to buy the stock from you. He could then immediately sell the stock for a profit.
This leads to an interesting situation in which both parties can profit on the same contract, just not by as much as either could have. Stock XYZ is selling for $10. Party A contracts to sell the stock for $9 to party B 30 days in the future. In 15 days the stock has dropped to $5 and party A buys it looking to make $4 on the sale to B. In 30 days the stock has rebounded to $13 and party B buys the contract stock and sells it making $4.
Both parties could also lose. Same contract but at 15 days XYZ makes an announcement that send prices soaring to $13 and it looks like it's going nowhere but up. Party A buys the stock to minimize loss to $4. At 29 days a major problem is found and the stock drops to $5 and looks to be going nowhere but down. Party B fulfills the contract and sells losing $4.
Isn't gambling wonderful?
Re: Something I never understood, Short Selling...
It has the side effect though of making it valuable to have the market fall.
So, the unscrupulous can work towards consolodating riskier elements together, making initial short term gains as the stocks go up, but as they reach their peaks and the bad debt eventuates, they can make money as the markets fall again.
That's, basicly, where we're at right now.
So, the unscrupulous can work towards consolodating riskier elements together, making initial short term gains as the stocks go up, but as they reach their peaks and the bad debt eventuates, they can make money as the markets fall again.
That's, basicly, where we're at right now.
Re: Something I never understood, Short Selling...
Short selling is where you "borrow" stock from someone, sell it now, and hope that the price goes down so you can buy back the shares you borrowed at a lower price, thus making a profit for yourself. The gamble is that if you sell now and the price goes up, you still have to buy the shares back to return to the owner, but you lose money in the deal.
The problem is that the traders who are short selling have been doing it recently with shares of banks and financial institutions that are going south. When you sell stock, it tends to drive the price down, so when a lot of people sell, it drives the share price down quicker... which is good for the short seller, but bad for the company whose stock is being played with.
The ban that was put in place does not eliminate all short selling, it limits it to a smaller set of stocks. There are about 800 financial and related companies whose stock is barred from being sold short for the time being. Other restrictions are also in place, but this is it in a nutshell.
-M
The problem is that the traders who are short selling have been doing it recently with shares of banks and financial institutions that are going south. When you sell stock, it tends to drive the price down, so when a lot of people sell, it drives the share price down quicker... which is good for the short seller, but bad for the company whose stock is being played with.
The ban that was put in place does not eliminate all short selling, it limits it to a smaller set of stocks. There are about 800 financial and related companies whose stock is barred from being sold short for the time being. Other restrictions are also in place, but this is it in a nutshell.
-M