As I continue to learn about the stock market I wa
Post# of 7769
Posted On: 11/25/2014 6:25:58 PM
As I continue to learn about the stock market I was amazed to learn one aspect of shorting a stock I didn't realize. If you are an experienced investor you will be bored with the information in this post. If not, you may be just as amazed as I was. I didn't realize a brokerage firm can loan my shares out to be shorted. The more shares I own on my market, the greater the chance they can be loaned out. This is one reason I have decided not to register my five cent shares until I plan to sell them. Doing so early with no intention to sell them only allows a brokerage firm to loan them out to be shorted. If I am not mistaken this does more harm than good especially for a stock like SCRC trying to break away from being shorted. My thought would be if you don't need to sell, don't register or deposit your shares. Below is an article on shorting a stock I found interesting.
Short Selling: What Is Short Selling?
By Investopedia Staff
First, let's describe what short selling means when you purchase shares of stock. In purchasing stocks, you buy a piece of ownership in the company. The buying and selling of stocks can occur with a stock broker or directly from the company. Brokers are most commonly used. They serve as an intermediary between the investor and the seller and often charge a fee for their services.
When using a broker, you will need to set up an account. The account that's set up is either a cash account or a margin account. A cash account requires that you pay for your stock when you make the purchase, but with a margin account the broker lends you a portion of the funds at the time of purchase and the security acts as collateral.
• In a short sale, an investor borrows shares, sells them and must eventually return the same shares (cover). Profit (or loss) is made on the difference between the price at which the shares are borrowed compared to when they are returned.
When an investor goes long on an investment, it means that he or she has bought a stock believing its price will rise in the future. Conversely, when an investor goes short, he or she is anticipating a decrease in share price.
Short selling is the selling of a stock that the seller doesn't own. More specifically, a short sale is the sale of a security that isn't owned by the seller, but that is promised to be delivered. That may sound confusing, but it's actually a simple concept. (To learn more, read Benefit From Borrowed Securities.)
Still with us? Here's the skinny: when you short sell a stock, your broker will lend it to you. The stock will come from the brokerage's own inventory, from another one of the firm's customers, or from another brokerage firm. The shares are sold and the proceeds are credited to your account. Sooner or later, you must "close" the short by buying back the same number of shares (called covering) and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, you have to buy it back at the higher price, and you lose money.
Most of the time, you can hold a short for as long as you want, although interest is charged on margin accounts, so keeping a short sale open for a long time will cost more However, you can be forced to cover if the lender wants the stock you borrowed back. Brokerages can't sell what they don't have, so yours will either have to come up with new shares to borrow, or you'll have to cover. This is known as being called away. It doesn't happen often, but is possible if many investors are short selling a particular security.
Because you don't own the stock you're short selling (you borrowed and then sold it), you must pay the lender of the stock any dividends or rights declared during the course of the loan. If the stock splits during the course of your short, you'll owe twice the number of shares at half the price. (To learn more about stock splits, read Understanding Stock Splits.)
Short selling is another technique you can add to your trading toolbox. That is, if it fits with your risk tolerance and investing style. Short selling provides a sizable opportunity with a hefty dose of risk. We hope this tutorial has enabled you to understand whether it's something you would like to pursue. Let's recap:
• In a short sale, an investor borrows shares, sells them and must eventually return the same shares (cover). Profit (or loss) is made on the difference between the price at which the shares are borrowed compared to when they are returned.
• An investor makes money only when a shorted security falls in value.
• Short selling is done on margin, and so is subject to the rules of margin trading.
• The shorter must pay the lender any dividends or rights declared during the course of the loan.
• The two reasons for shorting are to speculate and to hedge.
• There are restrictions as to what stocks can be shorted and when a short can be carried out (uptick rule).
• Short interest tells us the number of shares that have already been sold short in a security.
• Short selling is very risky. You can lose more money than you invest but are limited to 100% profit on the upside.
• A short squeeze is when a large number of short sellers try to cover their positions at the same time, driving up the price of a stock.
• Even though a company is overvalued, it may take a long time for it to come back down. Fighting the trend almost always leads to trouble.
• Critics of short selling see it as unethical and bad for the market.
• Short selling contributes to the market by providing liquidity, efficiency and acting as a voice of reason in bull markets.
• Some unethical traders spread false information in an attempt to drive the price of a stock down and make a profit by selling short.
Short Selling: What Is Short Selling?
By Investopedia Staff
First, let's describe what short selling means when you purchase shares of stock. In purchasing stocks, you buy a piece of ownership in the company. The buying and selling of stocks can occur with a stock broker or directly from the company. Brokers are most commonly used. They serve as an intermediary between the investor and the seller and often charge a fee for their services.
When using a broker, you will need to set up an account. The account that's set up is either a cash account or a margin account. A cash account requires that you pay for your stock when you make the purchase, but with a margin account the broker lends you a portion of the funds at the time of purchase and the security acts as collateral.
• In a short sale, an investor borrows shares, sells them and must eventually return the same shares (cover). Profit (or loss) is made on the difference between the price at which the shares are borrowed compared to when they are returned.
When an investor goes long on an investment, it means that he or she has bought a stock believing its price will rise in the future. Conversely, when an investor goes short, he or she is anticipating a decrease in share price.
Short selling is the selling of a stock that the seller doesn't own. More specifically, a short sale is the sale of a security that isn't owned by the seller, but that is promised to be delivered. That may sound confusing, but it's actually a simple concept. (To learn more, read Benefit From Borrowed Securities.)
Still with us? Here's the skinny: when you short sell a stock, your broker will lend it to you. The stock will come from the brokerage's own inventory, from another one of the firm's customers, or from another brokerage firm. The shares are sold and the proceeds are credited to your account. Sooner or later, you must "close" the short by buying back the same number of shares (called covering) and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, you have to buy it back at the higher price, and you lose money.
Most of the time, you can hold a short for as long as you want, although interest is charged on margin accounts, so keeping a short sale open for a long time will cost more However, you can be forced to cover if the lender wants the stock you borrowed back. Brokerages can't sell what they don't have, so yours will either have to come up with new shares to borrow, or you'll have to cover. This is known as being called away. It doesn't happen often, but is possible if many investors are short selling a particular security.
Because you don't own the stock you're short selling (you borrowed and then sold it), you must pay the lender of the stock any dividends or rights declared during the course of the loan. If the stock splits during the course of your short, you'll owe twice the number of shares at half the price. (To learn more about stock splits, read Understanding Stock Splits.)
Short selling is another technique you can add to your trading toolbox. That is, if it fits with your risk tolerance and investing style. Short selling provides a sizable opportunity with a hefty dose of risk. We hope this tutorial has enabled you to understand whether it's something you would like to pursue. Let's recap:
• In a short sale, an investor borrows shares, sells them and must eventually return the same shares (cover). Profit (or loss) is made on the difference between the price at which the shares are borrowed compared to when they are returned.
• An investor makes money only when a shorted security falls in value.
• Short selling is done on margin, and so is subject to the rules of margin trading.
• The shorter must pay the lender any dividends or rights declared during the course of the loan.
• The two reasons for shorting are to speculate and to hedge.
• There are restrictions as to what stocks can be shorted and when a short can be carried out (uptick rule).
• Short interest tells us the number of shares that have already been sold short in a security.
• Short selling is very risky. You can lose more money than you invest but are limited to 100% profit on the upside.
• A short squeeze is when a large number of short sellers try to cover their positions at the same time, driving up the price of a stock.
• Even though a company is overvalued, it may take a long time for it to come back down. Fighting the trend almost always leads to trouble.
• Critics of short selling see it as unethical and bad for the market.
• Short selling contributes to the market by providing liquidity, efficiency and acting as a voice of reason in bull markets.
• Some unethical traders spread false information in an attempt to drive the price of a stock down and make a profit by selling short.
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