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Ask HN: Please explain short selling?

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Re: Ask HN: Please explain short selling?

#71

Post by cynicalkane »

cturner wrote: post #56
cynicalkane wrote: post #31

Earlier quoted context omitted.

The difference is, for the value investor, the selling part is optional. A company can repay its investors with dividends, liquidation (rare), being bought out... Often value investors end up selling to the market, but you have to break away from the mentality that buy low sell high is the point of "investing". If it is that way, then it's a zero-sum game, so why's it an important part of capitalism again?

If it is that way, then it's a zero-sum game No, because the amount of value in the system trends up over time. There is not a fixed amount of wealth in the world.

The point is that stocks are not a priori worth money just because they represent a share of a company. Value has to come from them somehow.

Re: Ask HN: Please explain short selling?

#72

Post by jawn »

lrm242 wrote: post #26
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?

To be fair, I think lrm was responding more to the random walk, TA is bullshit mindset than to what was actually posted by mechanical_fish.

Re: Ask HN: Please explain short selling?

#73

Post by byrneseyeview »

tjmaxal wrote: post #65
clistctrl wrote: post #45

Earlier quoted context omitted.

As someone who has also tried to write one, I'll agree with his statement. Often following the technicals works very well. But if you know nothing about the fundamentals, one of these days you're going to end up making a very bad trade. I wrote my system so as to limit my losses. Which seems to work well. In my opinion the best way to trade is to make a decision to enter/exit the market based on fundamentals, and use…

but you have to remember the vast majority of trades are made by humans and the vast majority of humans are emotional not always logical creatures. So the technicals which don't account for human emotions are bound to be wrong a certain (usually large)percentage of the time.

This is no longer true. Most trades are automated, to one extent or another. The intent is generally from humans, though--for example, if one person is bullish about a stock, and purchases 10,000 shares, it might lead to 30,000 more shares being traded by algorithms trying to capture profits from the tiny perturbations caused by this initial trade).

However, many stock trading algorithms appear to fade short-term trends and ride long-term trends (you can see this if you look at stocks with high hedge fund ownership; they tend to have gone up a lot, with any extreme moves quickly dampened).

Re: Ask HN: Please explain short selling?

#74

Post by tomkarlo »

dkokelley wrote: post #61
fexl wrote: post #14

I'm a hedge fund accountant, and my software follows many thousands of trades including short sales. I know exactly how to account for these trades, but I have no idea what's really going on. As an accountant, all I see is that someone sold 1200 XYZ shares at $23.00 each, receiving a grand total of $27,600 cash. To simplify the example, I am not subtracting any commission there. Now the funny thing is, this account d…

I'm a bit confused about the supply being artificially raised during a naked short. I was under the impression that the brokerage actually lent me the shares to then sell, and it was my responsibility to return those shares at some point. I suppose with any form of credit/debt, you can create a market with more shares than actually exist. You're selling the promise of shares. The only other thing I can think of is th…

You're assuming that the shares actually move from buyer to seller at the time of the transaction, which they don't. For the most basic of trades, it can take several days for the trade to close, so a naked short can sell shares they don't actually have and then hope that they can get some before the trade closes (I think it's 3 days but it's been a while since I thought about these things.)

In other cases, especially retail accounts, the shares are really being held in trust by the brokerage so they're not actually necessarily being moved, it's more of a pool where you have a specific claim on that pool based on the value of the assets in your account. (This is in fact where the "borrow" on a stock may come from - that same brokerage may be lending shares from that pool to people who want to short a stock - generally you can tell the brokerage not to lend your shares out to those shorting.)

The classic short squeeze example, by the way, is the recent Porsche / VW short squeeze where Porsche essentially screwed shorts by buying up so much of VW that there was only 6% of stock left in "float" while there was 12.1% of the company on loan to shorts. All of a sudden there were 2 shares of shorted stock for every 1 not owned by Porsche, and they could pretty much dictate whatever price they wanted to shorts desperate to close out their positions. Totally fair, very funny.

Re: Ask HN: Please explain short selling?

#75

Post by adamzochowski »

ddlatham wrote: post #69
fexl wrote: post #14

I'm a hedge fund accountant, and my software follows many thousands of trades including short sales. I know exactly how to account for these trades, but I have no idea what's really going on. As an accountant, all I see is that someone sold 1200 XYZ shares at $23.00 each, receiving a grand total of $27,600 cash. To simplify the example, I am not subtracting any commission there. Now the funny thing is, this account d…

What happens when I buy some shares from someone who happened to be short selling them naked, then I try to vote those shares in the next proxy vote?

I assume you buy the non voting shares.

Re: Ask HN: Please explain short selling?

#77

Post by bd_at_rivenhill »

elecengin wrote: post #16

I think there are plenty of good descriptions of the basics of short selling here, but I wanted to help explain the "who are you borrowing from" aspect. When you trade, you must trade through a broker-dealer. A broker-dealer is authorized to trade on behalf of it's customers. A broker-dealer must uphold certain regulatory requirements put in place by the SEC, and policed by a variety of government and non-government…

One other point to note here: when you open a margin account at a brokerage, you are asked to sign a number of agreements such as a credit agreement (officially recognizing that you will be borrowing money and specifying the interest rate), a hypothecation agreement (pledging the assets of the account as collateral for the margin loan and permitting the brokerage to subsequently re-pledge them as collateral to a bank from which it borrows the money that it loans you), and a loan consent agreement, which gives the brokerage the right to loan your shores to clients who wish to borrow stock for short selling. The broker will certainly require you to sign the first two, but according to the regs, they cannot require you to sign the loan consent agreement. However, I didn't see an easy way to opt out of it when I signed up for my account with a discount broker and it didn't seem worth the hassle to navigate their customer service to opt out even though lending provides them with a profitable business which I, as the ultimate lender, am not compensated for.

Re: Ask HN: Please explain short selling?

#79

Post by ewanmcteagle »

jamesseda wrote: post #60
danielsoneg wrote: post #48

Earlier quoted context omitted.

Well, the problem is less that there are more shares of a company for sale than currently exist and more that it can generate high levels of unrealistic downward pressure on a stock. With a normal short sale, there is some balance between the long and short side - that is, you can only short so much before the longs start buying again and stop the downward price movement, and there are only so many people willing to…

Moral equivalent is, If you knew a self employed guy needed to sell his boat to keep his mortgage current, and you bought similar boats and sold them below cost so the guy would go into foreclosure and then you bought his property.

This is not the same. Once a company has sold stock it does not gain money from the ups and downs of the market. If it made agreements contingent on its stock maintaining a particular value then it has chosen a separate risk. A company cannot go out of business because its stock price is low. It can be bought by others but this also does not drive it out of business.

Re: Ask HN: Please explain short selling?

#80

Post by bernardlunn »

Naked Short Selling needs a new name. It sounds like Short Selling which is quite legitimate way to bet that a stock price will decline. Markets need traders who will spot problems at say Enron and bet against them.

But Naked Short Selling is simply fraud. It needs a new name.

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