So I just wrote a stock prediction system... I understand just enough about the market to be dangerous. One thing I simply cannot wrap me head around is selling short. Who are the stocks borrowed from? Are the people lending the shares actually hoping for the stocks success?
Ask HN: Please explain short selling?
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Re: Ask HN: Please explain short selling?
#2Short selling works like this:
Party A buys 500 MSFT shares from partner B today, and then immediately sells them at the current market price to C. Depending on the terms of the deal, party A must pay back the same number of shares at a later date to party B. Let's say 30 days later, party A rebuys 500 shares of MSFT at THAT current market rate (hoping it has decreased over the last 30 days), and repays the same number of shares (hoping it's a smaller $ value) to party B.
The people lending the short are expecting the stock to go up, the people buying are expecting it to go down.
Hope that helps
Re: Ask HN: Please explain short selling?
#3Short selling works like this: Party A buys 500 MSFT shares from partner B today, and then immediately sells them at the current market price to C. Depending on the terms of the deal, party A must pay back the same number of shares at a later date to party B. Let's say 30 days later, party A rebuys 500 shares of MSFT at THAT current market rate (hoping it has decreased over the last 30 days), and repays the same numb…
Does it work, if the people lending it, are just planning to hold the stock forever?
Re: Ask HN: Please explain short selling?
#4Short selling works like this: Party A buys 500 MSFT shares from partner B today, and then immediately sells them at the current market price to C. Depending on the terms of the deal, party A must pay back the same number of shares at a later date to party B. Let's say 30 days later, party A rebuys 500 shares of MSFT at THAT current market rate (hoping it has decreased over the last 30 days), and repays the same numb…
Does it work, if the people lending it, are just planning to hold the stock forever?
I think holding duration is part of the contract.
Re: Ask HN: Please explain short selling?
#5Short selling works like this: Party A buys 500 MSFT shares from partner B today, and then immediately sells them at the current market price to C. Depending on the terms of the deal, party A must pay back the same number of shares at a later date to party B. Let's say 30 days later, party A rebuys 500 shares of MSFT at THAT current market rate (hoping it has decreased over the last 30 days), and repays the same numb…
> The people lending the short are expecting the stock to go up
They might agree that the stock is going to go down, but, because they're long, i.e. expecting the stock to go up over a long period of time (e.g. by the time they retire), they don't care, or at the very least isn't willing to make the gamble.
Also, there's a fee for the lending.
Re: Ask HN: Please explain short selling?
#6Regular investing in the stock market is when you buy some stock, believing it will go up, so you can sell it at a profit at a later date.
If you believe the price of a stock will go down, then you can short it. This involves the opposite of regular investing, selling high first, then buying low later. To do this, you borrow the stock of someone else, with an agreement to pay them the stock back at a later date. You sell it straight away, then when the time comes to return the stock to the lender, when hopefully the stock price has gone down, you buy it back form the stock market, and give it back to the lender.
The lender of the stock usually gets some fee for lending it to you. They benefit, since they are just holding onto stock for the long term anyway.
Naked short selling is when you don't make an agreement to borrow the stock in the first place.
The losses you can receive from shorting stock can be huge, is the stock you sold goes up by a lot.
Re: Ask HN: Please explain short selling?
#7The concept could be illustrated this way (ethical considerations aside):
Let's say that there is a high demand for electric generators after a hurricane. You "borrow" as many generators from out of state friends as you can, and proceed to sell them at a premium (let's say $1500 each). After some time passes you find them on sale at Home Depot for $500. You buy enough of them to return to everyone you originally borrowed from, making a tidy profit in the process.
To answer the question more directly, short sellers borrow stocks from other stockholders. And, yes, the people lending the stocks are hoping for the stocks' success.
Re: Ask HN: Please explain short selling?
#8Short selling works like this: Party A buys 500 MSFT shares from partner B today, and then immediately sells them at the current market price to C. Depending on the terms of the deal, party A must pay back the same number of shares at a later date to party B. Let's say 30 days later, party A rebuys 500 shares of MSFT at THAT current market rate (hoping it has decreased over the last 30 days), and repays the same numb…
Usually the lenders are hedge funds, who hold large amounts of stocks of all sorts. They are playing a different game to shorters, and happy to get a fee for lending stock. So they make money in holding stock, which is what they were going to do anyway.
Re: Ask HN: Please explain short selling?
#9Short selling works like this: Party A buys 500 MSFT shares from partner B today, and then immediately sells them at the current market price to C. Depending on the terms of the deal, party A must pay back the same number of shares at a later date to party B. Let's say 30 days later, party A rebuys 500 shares of MSFT at THAT current market rate (hoping it has decreased over the last 30 days), and repays the same numb…
If the lender of the stocks is long on the them, what incentive do they have to get involved in this workflow?
Re: Ask HN: Please explain short selling?
#10There is pretty interesting illustration of Naked Short Selling here: http://www.rollingstone.com/politics/news/12697/64824?RS_sho...