Is there a website or book for dummies like me to read to break it down into more examples and layman's language that you would recommend?
Thanks.
Short selling is when you sell stock you don’t own, because you think it is going to go down (and/or you are trying to push it down).
I borrow some stock from Alice and sell it to Bob, then I go out and buy on the open market to return what I borrowed from Alice. In practice it’s more complex than that (you may be asking what’s in it for Alice, in reality she probably never knows I “borrowed” her stock).
What’s described in the beginning of the article are options, in this case put options. When you buy a put option, you get the ability to sell a certain number of shares for a certain amount of money at a certain time. When that time comes, if the value of the shares have fallen below the agreed price, you can buy them at market price and sell them for the agreed on price, pocketing the difference (minus the cost you paid for the option, but you’ve already lost that money whether you exercise the option or not).
See also call options and naked shorting.
http://www.investopedia.com/terms/s/shortselling.asp
for an ordinary retail trader like me, we can “sell” shares which we don’t own.....hoping the price will soon go down, at which time we buy to “cover” at the lower price. (if it goes up enough to reach max pain, we cover at a higher price).
What I THINK you want to know about is organized manipulation that is beyond the reach of we retail traders....this will explain in detail in lay terms....well worth watching, as it is the object of all that you’ve heard about “naked” short sales that has taken down the market cap of many companies:
http://www.deepcapturethemovie.com/
PS.....here is the current RegSHO list....the page is also full of hotlinks for you to learn more about it. I suggest watching deepcapture before more than a quick look here:
http://www.nasdaqtrader.com/Trader.aspx?id=RegSHOThreshold
One idea is to start reading Denninger’s Market-Ticker.
You can search it for ternms, like ‘naked’:
If for current purposes we exclude buying and holding a stock for LT purposes of collecting dividends or experiencing LT capital gains, to profit from a stock (or any) “transaction”, one really has to perform *two* separate transactions. A buy, and a sell.
In essence, short-selling is not really different from “buy low-sell high”; it’s just that the “sell-high” event occurs *first*: before the “buy-low”. The two separate events that mark the endpoints of the buy-sell exercise are just reversed in time.
But the mechanics are a little squirrely, because you can’t sell something you don’t own. However, you can sell something you *borrowed* with the intention of being able to buy that something later and return what you borrowed to the rightful owner with you (hopefully) being able to buy that borrowed thing in the open market at a lower price than what you originally sold it for. You, yourself do not go out and post want ads “want to borrow 500 shares of GE” with your telephone number. Your stockbroker, though, DOES have to find those shares, somewhere...either in the account of one of its’ customers (who isn’t “using” them right now) or in the account of another brokerage somewhere. That “borrow” indeed HAS to occur, and your broker has to have reasonable expectations of being able to borrow them from somewhere before he lets you sell those shares short. It’s called a “borrow”. If he allows your short sale, yet cannot locate those shares within three days of your short sale, then he has to notify you, and you may be forced to extinguish your “negative share” position by buying the shares then and there...at a time NOT of your choosing, when the share price may not have declined as you expected, or worse, is higher than you borrowed them for. That’s called a “forced buy-in” and if you’re away from your phone, the broker can buy them “without your permission” but it is really *with* your permission because it’s among the possible outcomes you consent to when you short-sell in the first place.
There are times when a stock is “hard to locate” or “hard to borrow” and your broker may well prohibit the short sale in the first place OR, charge you for holding the short shares overnight. This can change day to day. I’ve shorted shares all day long Monday and was not permitted to short them Tuesday but could short them again Wednesday.
So there are several conclusions:
Short selling is inherently more “dangerous” because you may be forced to buy-in at a time not of your choosing. Let’s be very clear, that forced buy-in is 99.9% of cases going to occur at a time of *scarcity* of those shares, which means high demand for the shares which means the price is going to be high which means you are probably very uncomfortably in a “forced-to-lose-money” situation. It’s not exactly common for this to happen, but it DOES happen, and it is NEVER comfortable and NEVER convenient.
Mathematically, shorting can “only” produce a profit of the amount of the share price when you sold it going to zero; eg; 100% whereas a stock can double or triple more going long.
Shorting is a rather sophisticated strategy that has a number of complications over going long. The recent market is probably one of history’s greatest examples, with shorts, who started to come in fairly heavy came in circa SP 875 have universally had their faces ripped off for the past 200 SP points as the market has ground up almost relentlessly in the fastest, largest, most logic-defying move in stock market history.