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Posted by Turtle on January 3, 2007, 11:08 am
Hello everyone,
Can someone explain to me what short selling is?
I understand sort selling to be selling of a stock that the seller
doesn't own.
How is this possible?
and the buyer is hoping for the price to fall??
CU
John
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Posted by joetaxpayer on January 3, 2007, 12:30 pm
Turtle wrote:
> Hello everyone,
> Can someone explain to me what short selling is?
>
> I understand sort selling to be selling of a stock that the seller
> doesn't own.
>
> How is this possible?
> and the buyer is hoping for the price to fall??
>
> CU
> John
That's right.
My grandmother used to tell me this ditty:
"He who sells what isn't his'n must buy it back or go to prison."
If you believe a stock will go down in price, you "short" the stock. In
your account, you are then negative, say, 100 shares of IBM. You are
then liable to pay the buyer any dividends that IBM declares while you
are short. At some point in the future, you buy it back at a lower
price, and make a profit.
To the buyer, nothing looks any different than buying shares that were
not shares from a short sale.
If I were the original owner, shares I held in my margin account can be
borrowed for shorting. The only issue is that if I try to sell them, you
can't stop my broker from calling in the short shares. Usually, they
borrow other shares for you, but some stocks get 'squeezed' and you are
stuck covering your short.
JOE
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Posted by John A. Weeks III on January 3, 2007, 9:15 pm
> Can someone explain to me what short selling is?
> I understand sort selling to be selling of a stock that the seller
> doesn't own.
Normally, when you do a transaction, you first buy an item,
then you sell the item at a later date. If you buy for less
than you sold it for, you made a profit.
Short selling is almost the same, just in a different order.
You first sell an item, then at a later date, buy it so you can
give clear title to the person who you sold it to. If you buy
for less than you sold it for, you made a profit.
> How is this possible?
Short selling works because of three reasons....
1) brokers and market makers have a pool of shares sitting around
and available, so they can sell from that pool, and backfill later.
2) you have to pay interest on the deal because the broker or
market maker is loaning you those shares that you sold short.
3) that there are other stock speculators out there who are just
as sure that it will go up as you are sure it will go down.
> and the buyer is hoping for the price to fall??
The person doing a short sale hopes for the price to go down,
and down far enough to cover the costs (brokerage fees and
carrying costs). The end buyer's motivation doesn't matter.
They may be buying for a resale, they may be buying to hold,
or they may be buying to cover their own short.
In general, you have to be an experienced investor before a
broker will allow you to do short sales. You may even have
to be accredited (rated by the industry) to do it.
-john-
--
======================================================================
John A. Weeks III 952-432-2708 john@johnweeks.com
Newave Communications http://www.johnweeks.com
======================================================================
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Posted by Rich Carreiro on January 4, 2007, 4:29 pm
> 2) you have to pay interest on the deal because the broker or
> market maker is loaning you those shares that you sold short.
No, you don't.
In all the brokerage accounts I've ever had, the short
sale proceeds are frozen and marked-to-market against
the margin account. If the shorted stock declines,
cash comes out of the frozen proceeds and flows into
the margin account. If the shorted stock appreciates,
cash comes out of the margin account and flows into
the frozen proceeds.
In the first case, you obviously pay no interest.
In the second case, you pay no interest unless the
flow creates a debit balance in the margin account.
On the flip side, I've never yet had a brokerage
account where *I'm* paid interest on the frozen
short-sale proceeds, though I've been told such
brokerages do exist.
> In general, you have to be an experienced investor before a
> broker will allow you to do short sales.
Since when? Every brokerage account I've ever had
let me short sell as soon as I sent in a margin
agreement. So the gating function is whether or not
they let you have a margin account. And they're
pretty loose about handing out margin accounts.
> You may even have to be accredited (rated by the industry) to do it.
I'd be very surprised to find out that was true.
--
Rich Carreiro rlcarr@animato.arlington.ma.us
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Posted by catalpa on January 5, 2007, 4:58 am
>
> On the flip side, I've never yet had a brokerage
> account where *I'm* paid interest on the frozen
> short-sale proceeds, though I've been told such
> brokerages do exist.
>
Interactive Brokers pays tiered floating rate interest on short sales based
on dollar break points. First $100k of balance gets zero, balance in excess
of $100k gets 4.05%, balance in excess of $1 million gets 4.8% and balance
in excess of $3 million gets 5.05%. They will also charge a fee for "hard to
borrow" stocks.
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