Hey Shorty!

Katherine Mangu-Ward | September 24, 2008

A short video explaining short selling using short words, including a short reference to yours truly.

Comments

rap|9.24.08 @ 4:52PM|#

Where did they find the really short man to stand beside you?

|9.24.08 @ 5:11PM|#

And while we're at it, let's have a federal law outlawing the "No Pass" line on crap tables.

Elemenope|9.24.08 @ 5:11PM|#

Not bad for a 60-second explanation.

Now, if they could just do this for DEMAND KURV...!

|9.24.08 @ 5:11PM|#

I feel short-changed after watching that.

|9.24.08 @ 5:36PM|#

What I don't understand is what the borrower gets out of the deal. So the woman figure borrows a $10 stock, the value while she's holding it goes down. She already has a contract from a buyer at $10, so she makes a $4 profit. What does the borrower get? Doesn't she still owe them the price of the stock when she borrowed it?

Kolohe|9.24.08 @ 5:48PM|#

What does the borrower get?

You mean the lender of the stock, right?

I think the person who lends the stock out gets an interest payment, similar to what one pays on a margin account.

|9.24.08 @ 5:49PM|#

StupendousMan From Wikipedia:

In the U.S., in order to sell stocks short, the seller must arrange for a broker-dealer to confirm that it is able to make delivery of the shorted securities. This is referred to as a "locate." Brokers have a variety of means to borrow stocks in order to facilitate locates and make good delivery of the shorted security.

The vast majority of stock borrowed by U.S. brokers come from loans made by the leading custody banks and fund management companies (see list below). Sometimes brokers are able to borrow stocks from their customers who own "long" positions. In these cases, if the customer has fully paid for the long position, the broker cannot borrow the security without the express permission of the customer, and the broker must provide the customer with collateral and pay a fee to the customer. In cases where the customer has not fully paid for the long position (meaning the customer borrowed money from the broker in order to finance the purchase of the security), the broker will not need to inform the customer that the long position is being used to effect delivery of another client's short sale.

Most brokers will allow retail customers to borrow shares to short a stock only if one of their own customers has purchased the stock on margin. Brokers will go through the "locate" process outside their own firm to obtain borrowed shares from other brokers only for their large institutional customers.

Amakudari|9.24.08 @ 5:50PM|#

I didn't watch the video, but no, she owes the stock back. You borrow from someone who's betting on price increases (in reality, it's usually a huge bank or fund).

|9.24.08 @ 5:52PM|#

Thanks guys- makes sense.

mike|9.24.08 @ 6:52PM|#

@Kolohe: no the lender (ie you) get nothing as your shares are most likely held in street name. Some large institutional funds/pensions are able to demand payment, but most are not.

And what about liquidity death spiral?

Kolohe|9.24.08 @ 7:18PM|#

@Kolohe: no the lender (ie you) get nothing as your shares are most likely held in street name. Some large institutional funds/pensions are able to demand payment, but most are not.

Thanks for the correction.

However, and I've never actually done it, but I think my on-line brokerage charges me interest if I hold a short position (and at the same rate as if I went long with a margin account). So there's some money sloshing around there; I guess it just doesn't get to the retail level.

KipEsquire|9.24.08 @ 9:22PM|#

Long: Buy Low, Sell High.

Short: Sell High, Buy Low.

How much more explanation is needed?

(P.S. Wall Street: Buy Low, Sell Lower...)

johnl|9.24.08 @ 11:39PM|#

Kolohe your broker is getting interest from the shares in your margin account. It's lending those out. If you short and hold cash, you might end up collecting more interest than you are charged. Dividends can sting though.

Tym|9.25.08 @ 9:02AM|#

Dividends can sting though.

Yes, you have to pay the dividends on any shares you hold short.

|9.26.08 @ 2:53PM|#

Randolph Duke: "Tell him the best part, Mortimer"

Mortimer Duke: "Regardless whether our client makes or loses money, we still get our commission!"