ABC Nightline's lead story is an explanation of "short selling"

[Bozita]

Very interesting.

But then, I remember some folks shorting the stocks of major airlines just before 9/11.

Never could find them, eh?

[Tandalayo_Scheisskopf]

1. It has parrelels down on our side of the economic food chain:

Down here, we call it "Borrowing someone's car and robbing a convenience store", but it is pretty much the same.

[aquart]

2. Did they say it was selling something you don't own for a high price?

And then buying the same amount somewhere for a low price and fobbing that off on your victim?

In every other venue but finance WE CALL THAT FRAUD.

[BrklynLiberal]

3. That is true....and so would Buying Long be fraud.

[girl gone mad]

4. short selling is fraud?

Now I've heard everything. :eyes:

[aquart]

6. See that bicycle. You can have it for sixty bucks.

You say okay and hand me the sixty bucks. The real owner comes by and rides it away. Meantime, I am running around trying to find a bicycle for $40 bucks I can give you instead.

Selling what you don't own is, everywhere but in financial circles, considered fraud.

[muriel_volestrangler]

8. That's *naked* short selling, and was completely banned a couple of days ago

after a temporary ban on naked short selling of 19 financial stocks earlier this summer:

Federal regulators on Wednesday took measures aimed at reining in aggressive forms of short-selling that were blamed in part for the demise of Lehman Brothers and which some feared could be used against other vulnerable companies in a turbulent market.

The Securities and Exchange Commission adopted rules it said would provide permanent protections against abusive "naked" short-selling. Unlike the SEC's temporary emergency ban this summer covering naked short-selling in the stocks of mortgage finance giants Fannie Mae and Freddie Mac and 17 large investment banks, the new rules apply to trading in the broader market.
...
Short sellers bet that a stock's price will fall so that they can profit from it. They borrow shares of the stock and sell them. If the price drops, they buy cheaper actual shares to cover the borrowed ones, pocketing the difference.

Naked short-selling occurs when sellers don't even borrow the shares before selling them, and then look to cover positions immediately after the sale.

http://ap.google.com/article/ALeqM5j1qYpENSJmaTaTiLWSUFodScpFTwD938R0JO0

[Tallison]

10. That's gangsta!

Seriously, I printed a Wiki article about it in an effort to understand yesterday, and I still don't understand it.

In better news, I now understand credit default swaps (I think).

[Aqaba]

5. They are blaming the crisis on the short sellers

When in fact the crisis is based on the fact that these investment banks, took a dog-turd of a mortgage, wrapped it gold paper (called it a Structured Investment Vehicle), passed it around to all manners of people all over the planet as an investment that would bring a return, set up deriviatives and insurance *based on the original SIV*, passed it around some more to inflate their balance sheets.

In short, these banksters took a dog turd and turned it into their own illusionary mountain of gold.

The people shorting these banks *knew* that their stock (based on their mountain of illusionary gold) was worth shit.

Its complete and utter bullshit.

Short selling had nothing to do with the mess. The short sellers actually showed the world what a mess it is.

[aquart]

7. Actually true.

That is still not a fragrance of roses emanating from the short sellers.

[ThomWV]

9. For those of you who have no idea what Short Selling is ...

It works like this. The first thing you need to understand is that brokers hold many shares of many stocks that they own and that their clients own. If you believe a stock will decrease in price you can go to a broker and borrow a number of those shares and sell them at the current high price. Then if you are correct and the price goes down you can later buy the same number of shares of the same stock and return them to the broker you borrowed them from. The difference in the price when you sold it and when you bought the replacement shares will be your profit - minus whatever fees you are required to pay for the loan of the shares for the time you held them. Of course if the price of the stock goes up you will have a problem. You still have to replace the shares, but now with ones that were more expensive than the one's you originally borrowed - so you will lose money. That's how it works.

Naked shorting is a different thing, and it should be illegal.

[Tallison]

11. What's the lending incentive to the broker?

Are they ostensibly unaffected by the swap, in that their plan is to keep the stock in the long run? Referring to the car in the garage analogy, the broker tells an intermediary, if you think you can make a profit on this car, you can borrow it for a few days, so long as you return an identical car to the garage by the next time I need it? How much time does an intermediary typically have before 'the car is due back in the garage'?

[ThomWV]

12. There are always fees invloved plus you must have money on account

They aren't going to let anybody that walks in off the street to do this, you have to have an account and one with money in it. I thought it needless to say that you never actually hold any of the stock. This is all done through the broker who will loan you the stock, sell it for you, do the bookeeping, buy the replacement stock at the appropriate time, and send you a check for the difference (actually they'll just put it in your account) minus fees. You have to have money in the account sufficient to buy back the stock if it goes up in price. So long as the cash you have in the account is sufficient to buy back the replacement shares the broker will let your short position go on, but if it starts comming close expect a phone call telling you to get your ass down to the office and put more money up or they will cover your position automatically and you will lose your money.

There is nothing unethical about short selling and it does not drive down a market in any way. It is simply a mechanism by which you can make money when stocks are decreasing in value.

[Tallison]

13. 'At the appropriate time'

This is what I'm hung up on.

Thanks, BTW, for taking the time to explain this; my degree's in religious studies, of all things...

So is the buyback dictated by a certain low price vs. when a predetermined time has past - whichever comes first? If the stock values defies expectation and increases in value, can the intermediary buy back at any time to contain his losses?

ETA: And if SS doesn't undermine market stability, why the moratorium?