2028 More Short Stuff

Monday, September 22, 2008

Talked w. Piper today. Learned more about "selling short". The description I gave is indeed a kindergarten version of the theory behind it, but the way it actually works is much more complicated. There's no "you", and no real stock "in hand". It's a gambling game in virtual space, but with real money. And if I described how it really worked, you'd laugh me out of the room.

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Ok, here goes, attempt #2:

- Stock ABC is selling at $30 a share.
- I go to you and offer to sell you 1000 shares at $30 per.
- I don't actually have any shares of ABC.
- You say ok, and you set up an account for me with $30,000 credit, what they're paying for the stock, in it.
- In exchange for this, I have to deposit a real $15,000 into the account.
- The account now has $45,000 in it. This is my money, and I owe you 1000 shares.
- You are betting the stock goes up.
- I am betting the stock goes down.
- The money sits there in the account.
- I get all the money in the account when I hand you the 1000 shares of ABC.
- If the stock goes down, say to $10 a share, I buy 1000 shares for $10,000, send them to you, and you release the $45,000 to me. I made $20,000 on the deal.
- If the stock goes up, I'm covered by what's in the account until it goes to $45 a share (or something - the amount of coverage is a bit fuzzy to me). If it goes over $45 a share, I have to put more money in the account to cover the increased value of the stock I owe you! At some point, say $50 a share, I panic at all the money I'm putting in that account, so I buy 1000 shares at the current price, $50, and send them to you, and you send me all the money in the account. (Seems like it would make more sense for you to just use the money in the account to buy 1000 shares, and send me any money left over, if any.) I made no money. Remember, I sold you the stock for $30 a share, but I had to buy it at $50 to fill my debt. I'm out $20,000. You made $20,000.

Stop laughing.
.