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.
---------------------
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.
.
Showing posts with label sell short. Show all posts
Showing posts with label sell short. Show all posts
Monday, September 22, 2008
Sunday, September 21, 2008
2026 What Does "Sell Short" mean?
Sunday, September 21, 2008
This is a very simple explanation.
- You have 10 shares of ABC, and it's selling for $100 a share right now.
- ABC looks to me like it might be overvalued, and the stock might be on the verge of a slide.
- I go to you and ask you to "lend" me your 10 shares, and I'll pay you Z dollars "rent" for them.
- I sell those shares, and pocket $1,000 dollars, minus the Z dollars "rent" I pay you.
- The stock drops. Now it's $20 a share.
- I buy 10 shares at $20 each, $200 worth, and I give them to you.
- I just made $800 minus Z dollars profit.
Of course there are a lot more details, but that's the basic theory. I am a short seller, and you are a fool. That's pretty much it, except that it's done on the level of hundreds of thousands of shares at a time, not 10.
I can get hurt doing it if the stock goes up instead of down and you demand your stock back, or the term of our contract ends, while it's high, and I have to buy stock to replace yours at a higher price. Piper has told me horror stories about people who were "caught short".
If the stock doesn't go down, you will get Z dollars profit and you still own the stock. It's like renting out your second home or something.
However, I still have trouble understanding why ANYONE would "rent out" the stock to a short seller. That would be like renting real estate to college students. It ISN'T likely to come back in the same condition.
The market is stacked in favor of short sellers, because if several of them sell huge blocks of stock all at once, that almost guarantees the price will fall. They can make their prediction come true simply by predicting it. There's gotta be something wrong with that. And that's why it's banned right now - to prevent an avalanche.
----------------------
UPDATE: 9/22/08 I talked with Piper today. The above description is the general theory of what happens, but it's not exactly how it happens. There's no "you", and no real "in the hand" stock. And if I told how it really worked, nobody'd believe me.
.
This is a very simple explanation.
- You have 10 shares of ABC, and it's selling for $100 a share right now.
- ABC looks to me like it might be overvalued, and the stock might be on the verge of a slide.
- I go to you and ask you to "lend" me your 10 shares, and I'll pay you Z dollars "rent" for them.
- I sell those shares, and pocket $1,000 dollars, minus the Z dollars "rent" I pay you.
- The stock drops. Now it's $20 a share.
- I buy 10 shares at $20 each, $200 worth, and I give them to you.
- I just made $800 minus Z dollars profit.
Of course there are a lot more details, but that's the basic theory. I am a short seller, and you are a fool. That's pretty much it, except that it's done on the level of hundreds of thousands of shares at a time, not 10.
I can get hurt doing it if the stock goes up instead of down and you demand your stock back, or the term of our contract ends, while it's high, and I have to buy stock to replace yours at a higher price. Piper has told me horror stories about people who were "caught short".
If the stock doesn't go down, you will get Z dollars profit and you still own the stock. It's like renting out your second home or something.
However, I still have trouble understanding why ANYONE would "rent out" the stock to a short seller. That would be like renting real estate to college students. It ISN'T likely to come back in the same condition.
The market is stacked in favor of short sellers, because if several of them sell huge blocks of stock all at once, that almost guarantees the price will fall. They can make their prediction come true simply by predicting it. There's gotta be something wrong with that. And that's why it's banned right now - to prevent an avalanche.
----------------------
UPDATE: 9/22/08 I talked with Piper today. The above description is the general theory of what happens, but it's not exactly how it happens. There's no "you", and no real "in the hand" stock. And if I told how it really worked, nobody'd believe me.
.
Subscribe to:
Posts (Atom)