Short Selling Stocks

[Thunder Dan]

I'm trying to wrap my head around this, can someone tell me if I'm right

So I would borrow $1,000 worth of a stock from a broker and immediately sell it back for $1,000...assuming the stock goes down, I make the difference in the fall of the stock minus the brokerage fees

So using Apple today (lost .44% or .42 cents) as an example

-I buy $1,000 worth yesterday at $96.35 giving me 10.378827 shares
-I then immediately sell them
-Now today when the stock went down I buy 10.378827 shares at the current price of $95.93 which costs me $995.64

so my profit (w/ brokerage fees) would be $1,000-995.64= $4.36 profit

is that it? I graduated with a Business degree oddly enough but finance and investments were my 2 weaknesses in school

[CosmicCowboy]

OK...When you short a stock basically you pay a "rental" fee to "borrow" stock from a brokerage. This fee can vary depending on the length of time you "borrow" it. You then sell the stock in the hope that you can buy it back at a later date for enough less than you sold it for to cover the rental fee and still make a profit. If you guess wrong and the stock moves the other direction you not only pay the rental fee but have to buy the stock back for more than you sold it for in order to "cover" your short position.

[RandomGuy]

http://www.iht.com/articles/2008/10/30/business/norris31.php

[I Love Me Some Me]

I'm trying to wrap my head around this, can someone tell me if I'm right

So I would borrow $1,000 worth of a stock from a broker and immediately sell it back for $1,000...assuming the stock goes down, I make the difference in the fall of the stock minus the brokerage fees

So using Apple today (lost .44% or .42 cents) as an example

-I buy $1,000 worth yesterday at $96.35 giving me 10.378827 shares
-I then immediately sell them
-Now today when the stock went down I buy 10.378827 shares at the current price of $95.93 which costs me $995.64

so my profit (w/ brokerage fees) would be $1,000-995.64= $4.36 profit

is that it? I graduated with a Business degree oddly enough but finance and investments were my 2 weaknesses in school

You don't necessarily "borrow" the shares as much as you hold a negative position for the number of shares you sold. Instead of looking at it monetary terms, think of it as being negative 10 shares of Apple. You sold shares you didn't have, for $96 a share. Your firm is going to require you to "fill" that position by purchasing 10 shares at some point in time. If the stock drops, you're in the money. If it goes up, you're screwed.

Most firms won't allow short selling unless their required due diligence shows that you are qualified to participate in what is a pretty high risk transaction.

[RandomGuy]

OK...When you short a stock basically you pay a "rental" fee to "borrow" stock from a brokerage. This fee can vary depending on the length of time you "borrow" it. You then sell the stock in the hope that you can buy it back at a later date for enough less than you sold it for to cover the rental fee and still make a profit. If you guess wrong and the stock moves the other direction you not only pay the rental fee but have to buy the stock back for more than you sold it for in order to "cover" your short position.

http://www.spurstalk.com/forums/showthread.php?t=114268


At any given point, only a certain amount of a publicly traded company’s stock is floating freely in the market. The rest is held in various portfolios, funds, and investment vehicles. Now, everyone’s familiar with the basic idea behind the stock market: you buy stock when it costs little, and you sell it when it costs a lot, profiting on the difference.

But that assumes a company’s value is going to increase. What if, instead of betting a company will go up, you want to make money betting the company will go down? You can — by selling stock you don’t own.
Say you borrow a certain amount of stock from someone who already owns it. You pay a fixed fee for borrowing the stock, and you sign a contract saying you will return exactly the same amount of stock you took after some amount of time. So, you might borrow a thousand shares of Apple stock from me (I don’t actually own any, but play along), pay me $100 for the privilege, and sign an obligation to return my stock in 3 months. At the time, Apple stock is worth $10 per share.

After you borrow the stock, you immediately sell it. At $10 a share, you get $10,000. Two and a half months later, another rumor about Steve Jobs’ health sends AAPL crashing to only $6 per share for a few hours, so you buy a thousand shares, costing you $6,000. You give me back those shares. Because you successfully bet the company would go down in value, you earned $4,000 minus the borrowing fee. This is called short-selling or shorting the stock, and the downside is obvious: if your bet was wrong, you would have lost money buying back the shares that you have to return to your lender.

[Thunder Dan]

OK...When you short a stock basically you pay a "rental" fee to "borrow" stock from a brokerage. This fee can vary depending on the length of time you "borrow" it. You then sell the stock in the hope that you can buy it back at a later date for enough less than you sold it for to cover the rental fee and still make a profit. If you guess wrong and the stock moves the other direction you not only pay the rental fee but have to buy the stock back for more than you sold it for in order to "cover" your short position.

so I'm way off with my example?

Why is this legal, isn't it just gambling with something you don't even own

[PM5K]

No you aren't way off, but I think I Love Me Some Me's explanation of having a negative position for the number of shares is a better way of understanding it.

Otherwise you are correct.

[RandomGuy]

so I'm way off with my example?

Why is this legal, isn't it just gambling with something you don't even own

That's nuthin.

Ask someone about the tens of trillions of dollars of credit default swap contracts floating around out there.

You can essentially bet on a company defaulting on its bonds without even owning the bonds.

Yes, I said tens of trillions of dollars. The nominal value of all known credit default swaps (and the real number is certainly higher) is greater than the entire economic output of the human species for several years.

[Thunder Dan]

thanks randomguy, that second paragraph explains it- I had trouble wrapping my head around buying a stock you never own and selling a stock you never own and who bought it- and why the company lending you the stock just didnt sell it and get rid of it themselves

obviously I'm asking because I'm about to go balls out and make some money on my life savings

[JoeChalupa]

Good luck.

[RandomGuy]

Heh, I must admit I simply copied and pasted from an excellent article that someone else posted.

I just happened to remember it existed. I bumped it if you want to read the whole thing.

It is fascinating, because it details how Porsche executed a short squeeze and made billions by driving up the price of volkswagen stock and forcing all of the short sellers to buy back the stock at inflated prices.

Bloody brilliant.

[Thunder Dan]

Good luck.

I just made $4 today with short selling Apple. After fees I only lost $150

[CosmicCowboy]

so I'm way off with my example?

Why is this legal, isn't it just gambling with something you don't even own

This is a financial vehicle for what are supposed to be "sophisticated" investors who are pre-approved for a certain "margin" or credit line.

Understand that when you buy a stock you typically never actually hold the physical stock certificates even though they actually exist...in theory they are held at the brokerage...so you "borrow" some of those certificates from the broker with the promise to "replace" them at a later date and then "sell" them to a real buyer. you ARE obligated to replace them at a later date and if the stock swings up instead of down you will be getting a "margin call" from your broker to either replace the stock immediately or bring in some more collateral to increase your credit line.

[Thunder Dan]

This is a financial vehicle for what are supposed to be "sophisticated" investors who are pre-approved for a certain "margin" or credit line.

Understand that when you buy a stock you typically never actually hold the physical stock certificates even though they actually exist...in theory they are held at the brokerage...so you "borrow" some of those certificates from the broker with the promise to "replace" them at a later date and then "sell" them to a real buyer. you ARE obligated to replace them at a later date and if the stock swings up instead of down you will be getting a "margin call" from your broker to either replace the stock immediately or bring in some more collateral to increase your credit line.

actually the reason I asked about all of this was because I got a notification from the brokerage I use that I am eligible for a credit line for futures, which I'm assuming is this. I took a ton of finance classes and all they basically said was to stay out of that kind of stuff because all it is is gambling- so I always just had vague explanations of what it was. So I asked my dad who is a pretty accomplished business guy and understands finances, and when I told him about it he got really stern and told me to not get into it and stay away from that type of trading. So naturally, when your parent tells you no, you have to find out why, so I looked it up and couldn't really get an explanation in lehman's terms

[RandomGuy]

actually the reason I asked about all of this was because I got a notification from the brokerage I use that I am eligible for a credit line for futures, which I'm assuming is this. I took a ton of finance classes and all they basically said was to stay out of that kind of stuff because all it is is gambling- so I always just had vague explanations of what it was. So I asked my dad who is a pretty accomplished business guy and understands finances, and when I told him about it he got really stern and told me to not get into it and stay away from that type of trading. So naturally, when your parent tells you no, you have to find out why, so I looked it up and couldn't really get an explanation in lehman's terms

Shorting stocks is for experts, like adjustable rate mortgages are for rich people.

If you have that much money I would simply say:

Berkshire Hathaway

or

A decent rental property.

[MannyIsGod]

thanks randomguy, that second paragraph explains it- I had trouble wrapping my head around buying a stock you never own and selling a stock you never own and who bought it- and why the company lending you the stock just didnt sell it and get rid of it themselves

obviously I'm asking because I'm about to go balls out and make some money on my life savings

By shorting?

[Thunder Dan]

Shorting stocks is for experts, like adjustable rate mortgages are for rich people.

If you have that much money I would simply say:

Berkshire Hathaway

or

A decent rental property.

yeah I'm not even getting into it. I'm pretty frugal with money so I'm not going to gamble it away in the stock market...maybe on a football or basketball game, but not of crap I have no clue about. Like I understand business quite a bit, but the inside crap like that Porcshe thing could doom me and I wouldn't even know. I just put money into my mutual funds right now

[RandomGuy]

yeah I'm not even getting into it. I'm pretty frugal with money so I'm not going to gamble it away in the stock market...maybe on a football or basketball game, but not of crap I have no clue about. Like I understand business quite a bit, but the inside crap like that Porcshe thing could doom me and I wouldn't even know. I just put money into my mutual funds right now

Ick. The vast majority of mutual funds are not worth it, IMO.

If you have a long time horizon consider buying something like Coke stock and do a dividend revinestment plan.

I have to go now, but I would be happy to give you some decent advice somewhat later, with links and shit, as I have done a LOT of research for my own retirement, and I am an accountant who likes to help people along these lines.

You should consider "I series" treasury bonds. Do a Google search on that and you can find a good page.

THE first goal in any investment plan is to get a cushion of cash, and this allows one to do that with excellent liquidity, virtually no risk, and about a five to six percent return.

[I Love Me Some Me]

This is a financial vehicle for what are supposed to be "sophisticated" investors who are pre-approved for a certain "margin" or credit line.

Understand that when you buy a stock you typically never actually hold the physical stock certificates even though they actually exist...in theory they are held at the brokerage...so you "borrow" some of those certificates from the broker with the promise to "replace" them at a later date and then "sell" them to a real buyer. you ARE obligated to replace them at a later date and if the stock swings up instead of down you will be getting a "margin call" from your broker to either replace the stock immediately or bring in some more collateral to increase your credit line.

Margin is actually a different vehicle than shorting is. Margin loans are cash loaned to you by the firm for the exclusive purpose of purchasing stock. The amount of the loan is based on a percentage of the total value of your portfolio. Short sales count against your portfolio value, and can impact your margin status. If your portfolio value falls below that stated percentage (by short sales, or just general market fluctuation) you will recieve a margin call, which will require you to come up with the cash to pay your margin loan down to get back under percentage. If you don't have the cash, the firm will sell your shares to generate the cash you need to meet the margin call.