Short Selling a Stock

[TNT.sixpack]

I have a rudimentary understanding of short sales....i.e. i know how it's done and the premise. I'm watching dogecoin now (i bought 15,000 shares 3 months ago before it was the target and subject of Reddit members this week).

Here's my question on short sales........If I own a stock in a poorly performing company, why would I agree to "loan" it to a hedge fund manager for a fee if I know the hedge fund manager's only intent is to drive the price of my stock down so that when they give it back to me, it's worthless or worth much less? Why am I agreeing to that?

Also, the concept of the hedge fund manager "borrowing" my stock. They're going to sell it immediately and then re-purchase it at a later date to return to me. How are they selling something that they don't own if it was "borrowed". That seems really sketchy.

I guess what I'm getting at, is this whole thing seems WAY sketchy and if the feds and SEC really wanted to prevent this debacle from happening again, why not just make it illegal to do short sales? Or at the very least, limit the amount of shares that can be "Borrowed" and sold in a short sale?

 

[Xenomorph]

The broker is lending the shares from his clients' portfolios. Similar to how a bank loans out your money. When enough of his clients demand their shares back or if the broker begins to feel the person responsible for paying them back is in an unstable position.. the loan is called and the shares must be bought and returned no matter the price.

/I'm probably off on some fine details. Hell, I'm not EF Hutton. But those are the broad strokes.

 

[TNT.sixpack]

Ok, that makes sense to me. So.........to my point, seems that if a broker knows the hedge funds are betting on the stock decreasing, to me that comes across as a conflict of interest for a broker. Especially in cases where the hedge funds do things to try to drive that stock price down, which we all know they do. In the example of the bank using my deposits to make loans, in what world would we be ok with the bank using my money to make a loan knowing good and well that they're likely only going pay me back 50 cents on the dollar for what they loaned using my money? What I'm saying is to me, there seems to be an easy fix here.

 

[The Fatboy]

Yeah I can find no good reason a broker would loan these stocks to a guy who is going to drive the stock price down on purpose.

That is not the same as a bank loaning my savings to someone else. First their is interest paid on the loan and 2nd my money is guaranteed by the FDIC.

 

[Xenomorph]

That USD is never worth the same amount when you take it out as it was when you deposited it.

 

[mstateglfr]

Ok, that makes sense to me. So.........to my point, seems that if a broker knows the hedge funds are betting on the stock decreasing, to me that comes across as a conflict of interest for a broker. Especially in cases where the hedge funds do things to try to drive that stock price down, which we all know they do. In the example of the bank using my deposits to make loans, in what world would we be ok with the bank using my money to make a loan knowing good and well that they're likely only going pay me back 50 cents on the dollar for what they loaned using my money? What I'm saying is to me, there seems to be an easy fix here.

It can be argued that short selling is an important part of the process to determine what the proper price is of a stock.
Its all gambling and if its OK for me to bet that the Lakers will win the NBA Championship, it should be OK for me to bet that the Lakers wont win the NBA Championship. That is a very simple short sell and while it isnt a perfect analogy, it hits on the same idea as short selling stock.

From what I see, short selling is an issue when people with vested interest in the stock dropping then actively play a role in seeing it drop(be it social media lies, going on media to spread rumor, etc).


It would be a lot simpler if you could only sell what you own and could only borrow that which the owner has expressly consented to lend. But there are downsides to a more restricted market too.


This is something that interests me and can be argued by academics while I sit and watch.

 

[BoDawg.sixpack]

There's also naked short selling, which is illegal but is rampant in the...

derivatives market. Naked short sellers sell shares that no one can prove actually exists. JP Morgan has been doing this in the silver ETF market for decades. It's why today's silver price is roughly half of what it was in 1980. Name one other thing that is selling for half of its price 40 years ago.

 

[UpTheMiddlex3Punt]

If you purchased the shares of stock on margin, your broker can loan them out without you explicitly agreeing to it. That's part of the agreement you have with the broker to get margin. If you want to tell the broker "don't loan it out", the broker will tell you to pony up the cash to own the shares outright. This is why wsb was recommending people purchase GME in cash accounts.

The only shares that can be borrowed are the actual shares. Whenever the shares are loaned out "new" shares are created, but they are not equivalent to the original shares. For one thing, there are no voting rights. Those go with the share when it's borrowed. Once the share is borrowed, the synthetic share remains in your account and your brokerage tells the company who the new owner of record is. That person gets to vote the shares, unless of course those shares are loaned out again.

It's a lot like a chain. One end of the chain is tied to the company and the other end is the person who owns the actual stock share. You can add a link to the end of the chain (this is the original share getting loaned out) or even remove links inside the chain (equivalent to someone in a margin account closing the long position), but you cannot attach a new link to create a new end of the chain inside the chain.

I hope this helps.

 

[TNT.sixpack]

If you purchased the shares of stock on margin, your broker can loan them out without you explicitly agreeing to it. That's part of the agreement you have with the broker to get margin. If you want to tell the broker "don't loan it out", the broker will tell you to pony up the cash to own the shares outright. This is why wsb was recommending people purchase GME in cash accounts.

The only shares that can be borrowed are the actual shares. Whenever the shares are loaned out "new" shares are created, but they are not equivalent to the original shares. For one thing, there are no voting rights. Those go with the share when it's borrowed. Once the share is borrowed, the synthetic share remains in your account and your brokerage tells the company who the new owner of record is. That person gets to vote the shares, unless of course those shares are loaned out again.

It's a lot like a chain. One end of the chain is tied to the company and the other end is the person who owns the actual stock share. You can add a link to the end of the chain (this is the original share getting loaned out) or even remove links inside the chain (equivalent to someone in a margin account closing the long position), but you cannot attach a new link to create a new end of the chain inside the chain.

I hope this helps.

Good, Lord. No. It didn't. I see too many moving parts.

 

[Xenomorph]

The broker charges huge fees and interest. That's what's in it for them.

 

[Mobile Bay]

derivatives market. Naked short sellers sell shares that no one can prove actually exists. JP Morgan has been doing this in the silver ETF market for decades. It's why today's silver price is roughly half of what it was in 1980. Name one other thing that is selling for half of its price 40 years ago.

The 1980 silver price was a bubble caused by the Hunt brothers attempt to corner the market, not a normal situation.

 

[dorndawg]

The 1980 silver price was a bubble caused by the Hunt brothers attempt to corner the market, not a normal situation.

Then they cornered the gas station pizza market.

 

[TNT.sixpack]

Then they cornered the gas station pizza market.

To be honest, it’s good pizza. But if I’m eating at a gas station, I’ll take the chicken tenders at Keiths on Highway 49 N. in Hattiesburg. And don’t even get me started on their sausage egg biscuit

 

[dorndawg]

To be honest, it’s good pizza. But if I’m eating at a gas station, I’ll take the chicken tenders at Keiths on Highway 49 N. in Hattiesburg. And don’t even get me started on their sausage egg biscuit

The finest chicken strips I've ever had were at a Mobil truckstop in El Dorado, AR.

 

[horshack.sixpack]

Bud's Chevron, Carthage. Pre hwy 25 widening. It was a must stop on the way to/from Starkville. Also, with 2 lanes at 55mhp it took longer to get to/from without some creativity and luck. Poor Bud's went belly up shortly after 25 expanded and took traffic from his front door step to an off/on ramp about 200 yards away.

 

[Mobile Bay]

The finest chicken strips I've ever had were at a Mobil truckstop in El Dorado, AR.

The Store off I-65 in Clanton is the best I have had.

Does anybody else watch the you tube channel where the guy just goes around Mississippi eating gas station food. AKA living the dream?

 

[horshack.sixpack]

Here's my rule. Don't play around with derivatives and synthetics. Fundamentals. Hold long positions. Ideally buy stocks that pay dividends so you are gaining when the company is doing well but the stock is just out of favor. For a long time now a huge % of trading volume is algorithmic and automated. You aren't gonna win that battle with firms paying 6 figures a month just to get their computers connected directly to exchanges via dark fiber. Then you have the professionals who invest/trade every single day of their lives. The idea that I'm gonna hop on during my lunch hour and best them is foolish. That being said, my brokerage account is running 5% over the S&P for the last 10 year period so I'm doing OK on longs. Not 615 "OK" but better than losing it all for sure!

 

[horshack.sixpack]

Interesting perspective here: https://taibbi.substack.com/p/suck-it-wall-street

 

[FISHDAWG]

The 1980 silver price was a bubble caused by the Hunt brothers attempt to corner the market, not a normal situation.

not sure who downvoted this or why but the post is spot on. The Hunt brothers were called before Congress to explain themselves and they just claimed they were protecting their investment ... Congress didn't buy it and they had to sell off a fair amount.... Shorting spot Silver back then a seller only had 24 hours to purchase the amount of Silver that he sold the day before .... Not sure how that works with stocks

 

[mstateglfr]

Here's my rule. Don't play around with derivatives and synthetics. Fundamentals. Hold long positions. Ideally buy stocks that pay dividends so you are gaining when the company is doing well but the stock is just out of favor. For a long time now a huge % of trading volume is algorithmic and automated. You aren't gonna win that battle with firms paying 6 figures a month just to get their computers connected directly to exchanges via dark fiber. Then you have the professionals who invest/trade every single day of their lives. The idea that I'm gonna hop on during my lunch hour and best them is foolish. That being said, my brokerage account is running 5% over the S&P for the last 10 year period so I'm doing OK on longs. Not 615 "OK" but better than losing it all for sure!

I read half this thread, worked, then came back to it at the start of gas station food. Then kept reading and saw this and thought you had posted in the wrong thread! Was so confused cuz all I was thinking about was gas station pizza and chicken fingers.
SPS is certainly diverse in its topics.

 

[patdog]

Exactly. My rule is use derivatives if you have a risk you need to hedge. Otherwise stay away from them. You're not going to beat the professionals consistently. Don't even try.

 

[horshack.sixpack]

Fair. Honestly anytime I find myself looking at offsetting risk for another position, I re-evaluate why I was buying the original position. There are a few cases where it makes sense, but more often than not, I just don't walk that path.

 

[horshack.sixpack]

Kinda nice. We can mourn Bud's Chevron and depleted portfolio's in one thread.

 

[patdog]

Agree that there's few cases where it makes sense. But one company I work with, it does make sense to be in the original position, so it makes sense to hedge it.

 

[BoDawg.sixpack]

Correct, but the silver price hit 50 bucks again 10 years ago and...

since then there's been another brutal sell off. And this is while real estate, stocks, crypto, even palladium, basically everything, has gone to the moon. The market is being reverse-cornered, if you will, by naked short sellers. Today the price is still having trouble getting any traction despite trillions in global debt that has been added due to coronavirus.

 

[paindonthurt_]

Shorting isn’t always terrible.

Sometimes a stock is driven up by buy, buy, buy. Allowing someone to short that stabilizes it to actual value.

Flip that concept and allowing the common man to drive up what someone shorted below value keeps shorters in check.

UNLESS, you handicap one side and let the other side play which is what happened this past week.

 

[JungRebel]

Exactly, my understanding is it is part of good price discovery. What happened this week is simply a reversal of someone overplaying their hand. Shorting Gamestop was not a bad idea at times last year and the company has been squeezed out of their market.

 

[goodknight]

Too old and close to retirement to be playing like this in the market but my sons have racked up this week.

 

[paindonthurt_]

That gas station went from printing cash to abandoned in 60 seconds flat.

Good tenders and long lines before and after games.

 

[patdog]

Yeah. That place was packed an hour or so after games ended.