A fun quick guide to short selling, or how a few greedy people are destroying society

Originally posted by dadudemon
Darth Jello, I could just look it up, but it would probably be better if I just asked.

I know nothing more about short selling after your explanation, than I did before.

I still don't know how the short seller is turning a profit.

Use numbers for me...and trace "the dollar/s" through the process to show me how the short seller ends up with a profit.

I think he's missing a step.

Buy --> Sell --> Drop Price --> Rebuy --> Sell

And yes, it does allow one to profit from driving a business (or entire economy) into the ground. Definitely not good for anyone in the long run.

Ok, here's an example/walkthrough. Stockbrokers own a certain surplus of stock. A short seller borrows some of the stock at the price of a transaction fee. He then sells the stock. Let's say the stock is worth $20 a share and the business is an online retailer in the spirit of amazon or overstock. The short seller then uses some of that money to create other accounts and pays people to use those accounts on the site to buy items and then flood the site with bad reviews so business goes down. As business goes down so does the price of the stock. So let's say now the price of the stock is only 5 cents a share and investors want to sell. So the short seller buys back the stock but now that the price has fallen, he doesn't pay the investors back 20 bucks a share, he pays back 5 cents. He then returns his shares to his stock broker, again paying only the transaction fee and keeps his profits.

so it's borrow->sell->devalue->buy->return

Originally posted by Darth Jello
Ok, here's an example/walkthrough. Stockbrokers own a certain surplus of stock. A short seller borrows some of the stock at the price of a transaction fee. He then sells the stock. Let's say the stock is worth $20 a share and the business is an online retailer in the spirit of amazon or overstock. The short seller then uses some of that money to create other accounts and pays people to use those accounts on the site to buy items and then flood the site with bad reviews so business goes down. As business goes down so does the price of the stock. So let's say now the price of the stock is only 5 cents a share and investors want to sell. So the short seller buys back the stock but now that the price has fallen, he doesn't pay the investors back 20 bucks a share, he pays back 5 cents. He then returns his shares to his stock broker, again paying only the transaction fee and keeps his profits.

so it's borrow->sell->devalue->buy->return

Okay.

I think I've got it now. The short seller "borrows" stocks for a fee. That short seller then sells those stocks to someone, rather quickly. Then the short seller waits until the stock price drops enough to turn a profit before buying the stocks he or she borrowed.

I didn't understand this, at first, because I couldn't understand why a stockholder would let someone borrow their stocks for a fee. But it makes sense, now. If the stock price goes up and the borrow agreement comes due, then the stockholder actually turns a profit. This is the other part of what I understand as "long" selling or something. So, this means that the original stockholder has the option of turning a profit from the short seller...while also getting a slight security in the form of the fee....meaning, it isn't a complete loss.

But, why would a stockholder allow the stock to be borrowed in the first place...it seems more risky than safe.

he doesn't wait for the stocks to drop in value and then buy them, the investors sell the stocks back when they drop in value. Theoretically if the stock price went up and the investor sold, the short seller would lose but again, the short seller does everything he can to make sure the price goes down. The stock broker does it to collect the fee. It's a stock broker, not a stock holder, the stocks belong to his/her firm not to him personally and they always own some surplus of stock.

here's a more fun and entertaining report, tho it is a bit simplified-
http://www.thedailyshow.com/video/index.jhtml?videoId=220550&title=The-Money-Honey-Bee

Originally posted by dadudemon
Darth Jello, I could just look it up, but it would probably be better if I just asked.

I know nothing more about short selling after your explanation, than I did before.

I still don't know how the short seller is turning a profit.

Use numbers for me...and trace "the dollar/s" through the process to show me how the short seller ends up with a profit.

There's several ways it can be done.

A short seller will borrow shares from someone who owns them. Sells them at the current market value of, say, a dollar each. The very act of selling a large number of shares is enough to drive the price of that share down so it goes down to say 90c...The short seller then undermines the company by starting false rumours of the company being in difficulty. This drives the share price way down. The short seller then uses the money he/she made from selling the shares at a dollar each to buy back the shares they borrowed in the 1st place at 30c a share and then gives those undervalued shares back to the person they borrowed from.

Oh well...waste of time me explaining that then...hahaha

Originally posted by jaden101
There's several ways it can be done.

A short seller will borrow shares from someone who owns them. Sells them at the current market value of, say, a dollar each. The very act of selling a large number of shares is enough to drive the price of that share down so it goes down to say 90c...The short seller then undermines the company by starting false rumours of the company being in difficulty. This drives the share price way down. The short seller then uses the money he/she made from selling the shares at a dollar each to buy back the shares they borrowed in the 1st place at 30c a share and then gives those undervalued shares back to the person they borrowed from.

Okay what you're talking about is something that should be illegal and ALREADY IS illegal.

That is like saying buying stock should be illegal because it's like insurance fraud too. I can make rumors that the company just signed a new contract or will develop a new product that will be highly successful, this will drive the price up and make my shares worth more money. I can then sell my shares for a profit and when the truth comes out that it was all a lie, the stock will plummet and those people will lose their money.

What current laws does that violate?

Originally posted by jaden101
There's several ways it can be done.

A short seller will borrow shares from someone who owns them. Sells them at the current market value of, say, a dollar each. The very act of selling a large number of shares is enough to drive the price of that share down so it goes down to say 90c...The short seller then undermines the company by starting false rumours of the company being in difficulty. This drives the share price way down. The short seller then uses the money he/she made from selling the shares at a dollar each to buy back the shares they borrowed in the 1st place at 30c a share and then gives those undervalued shares back to the person they borrowed from.

So why wouldn't the stockholder decline to allow the borrow at fee? Wouldn't "short sellers" become obvious and they be black listed, eventually?

On what grounds if the money's green?

Originally posted by dadudemon
So why wouldn't the stockholder decline to allow the borrow at fee? Wouldn't "short sellers" become obvious and they be black listed, eventually?

Maybe no one cares as long as the money keeps coming.

Originally posted by Darth Jello
On what grounds if the money's green?

Maybe because they will lose money in the long term, but you're correct. Stockholders are usually short sighted.

Originally posted by Darth Jello
What current laws does that violate?

Originally posted by Darth Jello
If you do what the vast majority of short sellers do and manipulate the market through both legal and illegal means in order to drive prices down, then yes. You're devaluing currency, devaluing stock, devaluing the government's money by shorting municipal bonds, etc. You're ripping off everyone you sell to, you're ripping off you're broker, and you're destroying whoever you're shorting and potential throwing people out of work, bankrupting other investors and peoples' pensions, bankrupting public works projects, maintenance, and social programs, and astronomically driving up inflation.

You said by legal means as well. If you can manipulate the market to bring prices down why cant you manipulate it to artificially bring them up?

you can do that too, you didn't answer my question

Originally posted by Darth Jello
you can do that too, you didn't answer my question

What question? What laws does that currently violate?

Fraud would be one.

Or by that logic..are you okay with people short selling if they do nothing illegal?

Hiring new agencies to do hatchet jobs isn't fraud, it's slander and liable. Those are civil, not criminal offenses and so require a lot of work to prove, usually long after the fact if the victim files suit at all. Writing negative reviews, real or fake may be disingenuous and underhanded but it's technically not illegal. Sabotage is illegal but again, requires a justice department and/or SEC that is interested in equal justice which the Madoff scandal and the current investigation into their lawyers proves that they aren't. Selective reporting and corporate editorial control isn't illegal either.
And yes, I do think it should be illegal in all cases because of the extensive harm it does to society and the economy. It's one of those methods like government corruption, monopoly, and oligopoly by which you're precious laissez-faire free market destroys itself.

Originally posted by Darth Jello
Hiring new agencies to do hatchet jobs isn't fraud, it's slander and liable. Those are civil, not criminal offenses and so require a lot of work to prove, usually long after the fact if the victim files suit at all. Writing negative reviews, real or fake may be disingenuous and underhanded but it's technically not illegal. Sabotage is illegal but again, requires a justice department and/or SEC that is interested in equal justice which the Madoff scandal and the current investigation into their lawyers proves that they aren't. Selective reporting and corporate editorial control isn't illegal either.
And yes, I do think it should be illegal in all cases because of the extensive harm it does to society and the economy. It's one of those methods like government corruption, monopoly, and oligopoly by which you're precious laissez-faire free market destroys itself.

The scenario I gave is fraud. "# imposter: a person who makes deceitful pretenses "

Lieing about a company that will do well to pump up the value of your own stock, then selling it off at a high price causing the value of everyone elses to drop. You're using deception and and injuring people.

Originally posted by Darth Jello
It's one of those methods like government corruption, monopoly, and oligopoly by which you're precious laissez-faire free market destroys itself.

Are you saying Government corruption and even monopolys don't occur under a socialist or communist style economy 🙄

no i'm not. are you a monochromat sir?

wow. this stuff is is news to who now?
move to Costa Rica, invest your money in condominiums.
your problem with Wall Street is solved.

Originally posted by dadudemon
So why wouldn't the stockholder decline to allow the borrow at fee? Wouldn't "short sellers" become obvious and they be black listed, eventually?

Sometimes the stock holders have their eye on the long term and know their stock will recover. They'll then use their fee to reinvest in shares at the lower cost and play the waiting game.