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Ask HN: Please explain short selling?

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Re: Ask HN: Please explain short selling?

#21

Post by lrm242 »

megablast wrote: post #6

Regular 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…

The losses you can receive from buying a stock can be huge. The stock you bought could go to 0.

Re: Ask HN: Please explain short selling?

#22

Post by lrm242 »

cynicalkane wrote: post #15
megablast wrote: post #6

Regular 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…

Regular 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 That's speculation, not investing. I think it's important people understand the difference.

Really? Given the statement above, which boils down to: "buy low and sell high", what's the difference? Generally, market microstructure tells us there are speculators and value investors, both serving a due purpose in the functioning of a market. Value investors are most adequately described as those who buy an asset below market value, rather than at or above market value. Both types of market participants are in it to make a profit.

Re: Ask HN: Please explain short selling?

#25

Post by tarkin2 »

1. You borrow 100 shares from a broker.

2. You sell the 100 shares for, say, £1000 in total.

3. Prices for the share ideally go down. (You and others have been selling, after all)

4. You then buy 100 of the shares for, say, £900 in total

5. You then give the broker the 100 shares back

6. You've made £100

Normally the broker would charge a commission for the lending, hence his/her motivation. So if the commission were £10 you'd have £90 profit.

Naked short selling is when you miss out the broker. So you don't owe the broker anything, but you still need to give the buyer of your fictional shares something real, so you end up buying them, at a hopefully lower price, later.

Defenders of short-selling claim it helps quickly respon to fundamentals in the market place. For instance once we heard the US might fine BP people could start selling BPs shares without owning them (yet).

Re: Ask HN: Please explain short selling?

#26

Post by lrm242 »

mechanical_fish wrote: post #19

I just wrote a stock prediction system Oooh, a bankruptcy engine! The most prominent art form of our times. ;) You seem to understand that you've become dangerous to yourself and others. Be sure to keep listening to those thoughts. Just in case, you might want to get a tattoo: Past performance is not necessarily indicative of future results.

You do realize you're simply repeating commonly held bullshit wisdom, right?

Re: Ask HN: Please explain short selling?

#27

Post by gxti »

mduncan wrote: post #9
wdewind wrote: post #2

Short 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?

For one, it doesn't affect their pricing. If they're confident that the price will go up, then collecting some more money on lending fees is just icing on the cake.

For two, it helps to understand who actually owns shares. Most individuals trade in a "margin" account in which the trader gets some additional liquidity in exchange for lessened rights. These people don't actually own the shares they buy -- they are in fact owned by their broker, who keeps a pool of all the shares their clients purchase. Because of this, the broker can loan out some of the shares in that pool for additional revenue. If I remember correctly, there's little risk involved if the clients sold more shares than were still in the pool because the broker can simply call the loaned shares and force the borrower to find another lender. Additionally, dividends are not diminished by lent shares because the borrower is forced to pay the forgone dividend to the lender. There is, however, trouble with voting -- you can't vote shares you don't own, and your broker can't vote shares on your behalf if he doesn't own them either. So in effect, your voting power is diminished by the percentage of shares lent.

If you don't want your broker lending out your shares you can use a cash account instead. This puts the shares in your name, but you lose your ability to sell shares before the purchase has settled 2 business days later. Additionally you can't short-sell or borrow money. None of these are a great hindrance to a long-term investor though, so it may be worth the trouble.

Re: Ask HN: Please explain short selling?

#28

Post by fr0sty »

A few things: (and it seems lots of folks here know just enough to be dangerous)

1. Naked Short Selling is illegal. There is an exception for market makers that allows them to trade naked shorts but that is beyond the scope of this discussion.

2. All short selling done by retail customers, hedge-funds, etc. is all 'covered short selling'. This means that the stock being sold is first 'borrowed' from a third party. The third party is paid interest on their loan of stock which is their incentive for loaning it out.

3. There is no absolute time limit on the duration of a short position, but long-term short positions are difficult to hold because you still have to pay interest on the stock your borrowed which eats into potential profits.

Re: Ask HN: Please explain short selling?

#29

Post by gxti »

djb_hackernews wrote: post #23

Going to get down voted here but is anyone else concerned that we have people building price prediction systems and hedge fund accountants that admit they don't have a complete understanding of what a short sale is?

It's not that complicated, people are just too proud of their ignorance to bother learning (OP excepted since he went to the trouble of asking).

Re: Ask HN: Please explain short selling?

#30

Post by stcredzero »

px wrote: post #7

The 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 borr…

Let's say that there is a high demand for electric generators after a hurricane.

Are you also from Houston?

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