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Shorting

bigmike said: "I was wondering exactly what shorting is? I know that you are betting that the stock is going to go down instead of going up, but how do you make money etc."

thezster said: "Check out the definition on investopedia... it's probably better than I'm able to type... Trying to put it into layman's terms..... Imagine the market is like a big produce market.... and the price of tomatoes is really high right now - but you anticipate that the price won't stay high.... You go to a really big vendor (your broker) and ask to borrow a bag of tomatoes. He's a nice guy and says OK - and gives you (loans you) a bagful. Then you sell that bag of tomatoes to a customer for $10. Keep in mind that you have to return a bag of tomatoes to your friend (broker) someday..... Hopefully, the price of tomatoes will drop and you can buy another bag from someone else later at a cheaper price (say $8). When you do so, you give that particular bag back to your friend (broker) and say "thanks for the loan". You pocket the $2 difference."

Corey said: "I say, "Hey, friend, can I borrow your stock?" You say, "Sure!" I take it, and sell it on the market for $100! The stock's value drops to $95. I buy the stock back and say, "Here, friend, here is your share!" and pocket the $5. To you, nothing has changed -- you still have your share. And I just made $5."

bigmike said: "So, you would only do this if you had a feeling/idea that the stock was going to go down. Are there any risks or theories behind using this method of making money etc."

Corey said: "Absolutely! When going long, the most you can lose is your initial investment. When shorting, theoretically you could lose an infinite amount of money (as long as you never shorted and the price of the stock increased infinitely). Say you short 100 shares of a $5 stock. It goes to $20. Now you have to spend an extra $1500 to buy the shares back. Your principle investment was $500, and you lost $1500! If you had been long the stock and it went to 0, you only would have lost $500. See the risk? I am sure many others can enlighten you on the other risks. Normally I don't short...but that is pretty much because my broker doesn't have that feature..."

bigmike said: "ok, So, it is a very risky move to do but could also pay off a ton if you made the right decision."

Corey said: "In my parenthesis, I meant to say "never covered," not "never shorted.""

LongArm said: "[QUOTE=bigmike]ok, So, it is a very risky move to do but could also pay off a ton if you made the right decision.[/QUOTE] On the flip side, you can't MAKE more than 100% on a short, so the payoff is limited too. For practical purposes, though, shorting is not really any more risky than going long, as long as you're good about cutting your losses short--and as long as you're not shorting a stock that could triple overnight. :dazed052: Some stocks aren't shortable, BTW. That's because either the broker doesn't allow the shorting of stocks that trade below $5 (a common rule), or they just don't have that particular stock on hand to loan to you at the moment."

DaveinJapan said: "The risk actually IS higher (conceivably), because your losses can exceed 100% or more, even in one day! In general, that doesn't happen though (except with penny stocks and some other potential rockets). Personally, I'm short CFC, and MY biggest fear is of sudden news of a buyout...THAT is the short sellers equivalent of a bankruptcy, I think. And as for my FROM $18 LEND short...all I can say is...I'm a happy, happy guy. :th_coolio:"

LongArm said: "[QUOTE=DaveinJapan]The risk actually IS higher (conceivably), because your losses can exceed 100% or more, even in one day![/QUOTE] Right, Corey already pointed that out above. I wasn't arguing that. Just saying for PRACTICAL PURPOSES shorting need not be any more risky than going long, if one is prudent."

DaveinJapan said: "Sure, LongArm, I agree. The thing I think is more scary though, is that IF the thing goes through the roof (like, 100% or more real quick) it's possible that you could be blindsided into losing a lot more than you thought you were investing. Just potentially is all. Of course, with a long position, you stand to lose 100% of your investment at any given time (obviously unlikely), but with a short, you stand to lose much more (equally unlikely, unless you're shorting cheap, volitile stocks). Just a tad more scary, that was my only point. :th_coolio:"

Pb3190 said: "Is there a time frame for when you would have to 'return' the stocks?"

LongArm said: "[QUOTE=Pb3190]Is there a time frame for when you would have to 'return' the stocks?[/QUOTE] Nope. The broker can force you to cover your short at any time, but that's pretty rare, I think."

Wangberg said: "[QUOTE=LongArm] Some stocks aren't shortable, BTW. That's because either the broker doesn't allow the shorting of stocks that trade below $5 (a common rule), or they just don't have that particular stock on hand to loan to you at the moment.[/QUOTE] i've heard some of you mention (in previous posts) that your broker had no shares to short... so is there a limit to the amount of shares they allow to be shorted in a given day/month/year? if so, what determines this? is this a first come, first serve deal?"

AlfredSokol said: "They have to actually have the physical shares "on hand". The only limit for a trader would be the total of margin in their account."

Wangberg said: "so the same number of shares "on hand" are available to short or execute a normal buy?"

thezster said: "[QUOTE=Wangberg]i've heard some of you mention (in previous posts) that your broker had no shares to short... so is there a limit to the amount of shares they allow to be shorted in a given day/month/year? if so, what determines this? is this a first come, first serve deal?[/QUOTE] Each broker has a formula for shares available to short.... for instance.... (hypothetically) - E-Trade has 50 million shares of CAT in it's members combined portfolios.... only a portion of that 50 million shares is available to "loan" to other members for shorting purposes... E-Trade has to keep enough shares on hand for a percentage of the actual owners to sell, should they end up wanting to do so - and they have a formula to determine just how many shares are available to loan to others for shorting purposes.... In the event there is a run on CAT (a sell run) and E-trade begins to run out of shares available, they have the option of calling your short trade."

Wangberg said: "thanks fellas, crystal clear :D"

DaveinJapan said: "Hey Z, if they DO call in your short trade, is there any particular "pecking order"? I would guess maybe they'd go after the ones that are at or near margin call first? Or is it just totally random (you could have a great short position and just lose it through no fault of your own?)?"

thezster said: "[QUOTE=DaveinJapan]Hey Z, if they DO call in your short trade, is there any particular "pecking order"? I would guess maybe they'd go after the ones that are at or near margin call first? Or is it just totally random (you could have a great short position and just lose it through no fault of your own?)?[/QUOTE] I honestly don't know... I've never heard of it happening..."

DaveinJapan said: "Seems like it shouldn't happen, if the brokerage does the math correctly. And, if not, I guess it really doesn't matter who's shares they take back (they have the right to anyway)."