Short Selling

  

Categories: Trading, Investing

See: Short Squeeze. See: Short (or Short Position). See: Short Sale (not the real estate kind).

When you sell a stock, you are shorting it. That is, you are betting that its value will decline. Sad fact: any gains you make from shorting are taxed at ordinary income rates, even if you were short for over a year. Kind of a weird version of a Napoleon Complex.

Related or Semi-related Video

Finance: What are short cover and squeez...7 Views

00:00

finance a la shmoop what is short-covering

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and squeezing the shorts hmm alright ever see anyone walk uncomfortably out

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of the target changing room wearing something the clothing designer never [Man wearing tight clothing by changing room]

00:14

intended to fit onto that body yeah that would be squeezing the shorts in in Wall

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Street speak the term is kind of related a given stock has a float of say a

00:25

hundred million shares and averages trading of three million shares a day

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well there's a big hedge fund that's convinced the company's cancer curing [Woman gulps a pill]

00:33

drug will actually only turn the users toenails bright green and all of this

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will come to light soon the stock will sell off big so they shortened short and

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short recall that short selling is when an investor borrows stock betting that

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the stock will go down in price and then sells it so yeah that's how it works

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they essentially borrow securities from the brokerage with whom they've set up [Stock transfers from brokerage to hedge fund]

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the short selling arrangement those shares get sold at whatever price

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they're trading out at the time that the short sales happen the hedge fund then

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waits until the stock falls to its target price hoping that it actually [Cancer B Gone stock price falls]

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falls and doesn't go the wrong way at which point it then buys back the stock

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more cheaply delivering it back to the brokerage and booking what is you know

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hopefully a hefty profit right so they'd shorted it a hundred and then it falls

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to 80 and they buy it back and make twenty bucks a share but things don't

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always work out according to the best laid plans of hedge funders and men so

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cancer begun stock climbs despite the hedge fund having bet that it would go [Cancer B Gone stock increases]

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down well in horror the hedge fund watches as the stock climbs from 80 to

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82 to 85 to 90 with the fund all the more sure it's worth 10 bucks a share

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after continued shorting of more and more and more shares betting on the [People in meeting looking unhappy]

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downfall of cancer be gone while the hedge fund wakes up in more horror one

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morning to read the cover The Wall Street Journal which says the drug [Man reading newspaper]

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actually works so the CBG shoots suddenly to $200 the

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next moment leaving the hedge fund now with an average short sale price of

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around 85 bucks a share the hedge fund is $115 a share in losses now that's per

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share times the 10 million in shares it shorted and remember it

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only trades 3 million a day on an average day that's three days and change

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of short position on this stock the loss on this short has wiped out all the

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games for the year of the hedge fund and worse the stock now has virtually [Stock price rises]

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unlimited upside as cancer curing you know is a thing

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so the hedge fund is squeezed why squeezed well it's short position is [Man squeezes hedge fund water bomb and it pops]

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squeezed because now it absolutely has to buy back the shares at the $200 plus

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price and it has to buy him back because the odds of this stock Falls or goes

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down with all the positive headlines coming from journalists all around the

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world about cancer being cured well pretty low right stock probably going to

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300 400 who knows but it's going up so the hedge fund will have to capitulate [Man giving speech on stage]

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that it was wrong in shorting in the first place and all of its competitors

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know this fact as they carefully track the short position on the stock noting

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that some 50 percent of the hundred million total shares or 50 million

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shares that were floating were in fact short enormous short position like this

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one hedge fund wasn't the only one betting it would fall so being the

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kindly loving people that hedge funders are the competitors will be buying the [Competitors give money to brokerage]

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snot out of the stock for a while bidding to 20 to 30 to 40 until enough

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volume and shares transacting passes so that the hedge funds will have covered

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their shorts meaning the guys who shorted it at a hundred bucks have to

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pay to twenty to thirty to forty whatever the price is to unwind their

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shorts before the stock goes the 300 400 500 and bankrupts them that's getting

03:45

squeezed that's how short squeezes work and

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punishes hedge funders for ill-timed bets that are wrong and yeah you don't bet [Hedge funders sitting at a table]

03:53

against a curing cancer at least hopefully not in our world the position

03:56

there in those shorts being SQUOZE is uncomfortable like this uncomfortable [Man in tight pants in a changing room]

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