Jump to content
Sign in to follow this  
Jambothump

Short selling

Recommended Posts

Jambothump

I do not understand, how this works, you buy low, but have to wait till the stock rises again, if ever ? To make a profit ?

Please,  in terms a 5 year old would understand, explain ?

Share this post


Link to post
Share on other sites
Ribble
1 hour ago, Jambothump said:

I do not understand, how this works, you buy low, but have to wait till the stock rises again, if ever ? To make a profit ?

Please,  in terms a 5 year old would understand, explain ?

 

It more or less the opposite of what you say, simple example below

 

Shares in a company are currently £10

 

I borrow 100 shares at £10 and sell them for £1000

 

Later when the shares are down to £5 i buy 100 shares for £500 and replace the shares I borrowed, leaving me with £500 profit

Share this post


Link to post
Share on other sites
Gashauskis9

Taking a bet on something you expect to fall in value basically.  

Share this post


Link to post
Share on other sites
Jambothump
13 hours ago, Ribble said:

 

It more or less the opposite of what you say, simple example below

 

Shares in a company are currently £10

 

I borrow 100 shares at £10 and sell them for £1000

 

Later when the shares are down to £5 i buy 100 shares for £500 and replace the shares I borrowed, leaving me with £500 profit

So do stockbrokers routinely lend shares ? If so, what is in it for them ?

Share this post


Link to post
Share on other sites
Lord BJ
5 hours ago, Jambothump said:

So do stockbrokers routinely lend shares ? If so, what is in it for them ?

 

You get security lenders, whose basic business is to provide lending capabilities 

 

SEC’s lend securities to make money. There are charges associated with lending, in the same way you borrow from a bank or whatever. 

 

Its very common to borrow when making investments for a variety of reasons. It’s not a facility that your average joe would be dealing with. 

 

A lot of the thing for investment traders is about volume. Trading in volume is one of the keys to profitable investing and one of the reasons lending facilities exist. 

 

 

Share this post


Link to post
Share on other sites
trotter
18 minutes ago, Lord BJ said:

 

You get security lenders, whose basic business is to provide lending capabilities 

 

SEC’s lend securities to make money. There are charges associated with lending, in the same way you borrow from a bank or whatever. 

 

Its very common to borrow when making investments for a variety of reasons. It’s not a facility that your average joe would be dealing with. 

 

A lot of the thing for investment traders is about volume. Trading in volume is one of the keys to profitable investing and one of the reasons lending facilities exist. 

 

 

Also, for the lender the shares are not really at-risk. They must be replaced on a certain date. If the price goes up instead of down in that time, the short seller takes the hit, not the lender. He gets his shares back worth a higher price.

Share this post


Link to post
Share on other sites
Jambothump

I'd watched a film and a "dirty money" episode, about the crash in 2008, quite brutal.

Thanks for the info, thankfully, I'm not a financial gambler..

Share this post


Link to post
Share on other sites
Normthebarman

Watch Trading Places, that'll give you an idea. And also a sketch at Jamie Lee Curtis' chebs. 

Share this post


Link to post
Share on other sites
milky_26
12 hours ago, trotter said:

Also, for the lender the shares are not really at-risk. They must be replaced on a certain date. If the price goes up instead of down in that time, the short seller takes the hit, not the lender. He gets his shares back worth a higher price.

10-15 years ago a hedge fund tried to make money betting on the price of porsche shares dropping. they did not know that VW was about to invest and the prices rocketed costing the hedge fund a lot of money to get the shares back

Share this post


Link to post
Share on other sites
Sawdust Caesar
On ‎14‎/‎05‎/‎2019 at 11:44, Ribble said:

 

It more or less the opposite of what you say, simple example below

 

Shares in a company are currently £10

 

I borrow 100 shares at £10 and sell them for £1000

 

Later when the shares are down to £5 i buy 100 shares for £500 and replace the shares I borrowed, leaving me with £500 profit

Have you seen Casino Royale? If so, is this what Le Chifre was doing when lost all his money? When I watched it I couldn't understand how share prices not dropping was bad for him. Makes sense now.

Share this post


Link to post
Share on other sites
Kalamazoo Jambo
59 minutes ago, Sawdust Caesar said:

Have you seen Casino Royale? If so, is this what Le Chifre was doing when lost all his money? When I watched it I couldn't understand how share prices not dropping was bad for him. Makes sense now.

 

Yes, he was short-selling.

 

Probably the biggest problem with short-selling is that your losses can be almost unlimited.  If you simply buy shares as an investment, the most you can lose is 100% of your investment (i.e. if the Company goes under and the shares become worthless). But with short-selling, you losses aren't capped - the more a share price increases, the more you stand to lose if you've shorted that stock.

Share this post


Link to post
Share on other sites
Gorgiewave
Posted (edited)
On 14/05/2019 at 10:24, Jambothump said:

I do not understand, how this works, you buy low, but have to wait till the stock rises again, if ever ? To make a profit ?

Please,  in terms a 5 year old would understand, explain ?

 

A wants 100 shares in Tesco. One morning, he approaches B, who he thinks might have shares. B tells A to call back in an hour. In the meantime, B borrows 100 shares in Tesco from C and must return them, plus £5 interest, by the end of the day. After an hour, A calls back, B says he has the shares and sells them to A at £1 each, a total of £100. A has what he wanted and goes home happy. B, having borrowed C's shares and then sold them, has to get new ones to return 100 shares to C before the end of the day. He has £100 in his pocket from the sale to A. By the middle of the afternoon, Tesco shares are down to 90p each. This is what B was gambling would happen. B is the risk-taker in this scenario. If the share price had not fallen, he'd have lost money. B buys 100 shares in Tesco from D for £90. He then has £10 in his pocket (100-90). He returns the 100 shares to C plus £5, leaving B with £5 more than he started the day with.

 

End result: A has the 100 shares he wanted.

B has £5 profit.

C has £5 profit.

D has sold his shares for £90. This may have been better than waiting until the next day, when they might only have been worth £80. He might also have bought them for less than £90, in which case this is profit.

Edited by Gorgiewave

Share this post


Link to post
Share on other sites
Jambothump
12 hours ago, Normthebarman said:

Watch Trading Places, that'll give you an idea. And also a sketch at Jamie Lee Curtis' chebs. 

From memory, is that not about the "futures" market ?

Share this post


Link to post
Share on other sites
Lovecraft
Posted (edited)

Go watch The Big Short

 

 

Edited by Lovecraft

Share this post


Link to post
Share on other sites
Jambothump

Thanks all, read through this thread again, no longer confused ?

Share this post


Link to post
Share on other sites
AlphonseCapone
17 hours ago, Gorgiewave said:

 

A wants 100 shares in Tesco. One morning, he approaches B, who he thinks might have shares. B tells A to call back in an hour. In the meantime, B borrows 100 shares in Tesco from C and must return them, plus £5 interest, by the end of the day. After an hour, A calls back, B says he has the shares and sells them to A at £1 each, a total of £100. A has what he wanted and goes home happy. B, having borrowed C's shares and then sold them, has to get new ones to return 100 shares to C before the end of the day. He has £100 in his pocket from the sale to A. By the middle of the afternoon, Tesco shares are down to 90p each. This is what B was gambling would happen. B is the risk-taker in this scenario. If the share price had not fallen, he'd have lost money. B buys 100 shares in Tesco from D for £90. He then has £10 in his pocket (100-90). He returns the 100 shares to C plus £5, leaving B with £5 more than he started the day with.

 

End result: A has the 100 shares he wanted.

B has £5 profit.

C has £5 profit.

D has sold his shares for £90. This may have been better than waiting until the next day, when they might only have been worth £80. He might also have bought them for less than £90, in which case this is profit.

 

This is one of the best explanations of it I've seen. 

 

It's the borrowing shares aspect that confuses me most. 

Share this post


Link to post
Share on other sites
Jambothump

Understand it now, couldn't relate that understanding to a.n.other very easily. I'll keep at this wee mystery of finance, till it all appears simple. Probably is to those working or interested in finance ? ?

Share this post


Link to post
Share on other sites
Gorgiewave
1 hour ago, Jambothump said:

Understand it now, couldn't relate that understanding to a.n.other very easily. I'll keep at this wee mystery of finance, till it all appears simple. Probably is to those working or interested in finance ? ?

I don't work in finance but it was explained to me by a person who regulates the Spanish securities market and he understands it inside out (he also bans it from time to time).

 

The main point is a person is selling something that doesn't belong to him. He then has to replace it by buying another copy of the same thing for cheaper.

 

It could work with anything. You could borrow your pal's electric saw. Somebody might see you're using an electric saw and offer you £50 for it. If you know the same model of saw in the same condition is on sale at the shop down the road you for £40 you can sell one saw and buy the other. You then return the new saw to your pal.

 

Share this post


Link to post
Share on other sites
Maple Leaf
On 15/05/2019 at 16:09, Kalamazoo Jambo said:

 

Yes, he was short-selling.

 

Probably the biggest problem with short-selling is that your losses can be almost unlimited.  If you simply buy shares as an investment, the most you can lose is 100% of your investment (i.e. if the Company goes under and the shares become worthless). But with short-selling, you losses aren't capped - the more a share price increases, the more you stand to lose if you've shorted that stock.

 

Good summary.

 

Short selling is for gamblers, not investors.

Share this post


Link to post
Share on other sites
Jambothump
8 hours ago, Gorgiewave said:

I don't work in finance but it was explained to me by a person who regulates the Spanish securities market and he understands it inside out (he also bans it from time to time).

 

The main point is a person is selling something that doesn't belong to him. He then has to replace it by buying another copy of the same thing for cheaper.

 

It could work with anything. You could borrow your pal's electric saw. Somebody might see you're using an electric saw and offer you £50 for it. If you know the same model of saw in the same condition is on sale at the shop down the road you for £40 you can sell one saw and buy the other. You then return the new saw to your pal.

 

Very good analogy 

Share this post


Link to post
Share on other sites
milky_26
5 hours ago, Maple Leaf said:

 

Good summary.

 

Short selling is for gamblers, not investors.

yep here is a link to the VW porsche story i mentioned earlier it is reported hedge funds lost around £18 Billion

 

http://news.bbc.co.uk/1/hi/business/7697082.stm

Share this post


Link to post
Share on other sites
Old Castle Rock

Thought this was a thread about shorts, could do with a pair for the holidays, will jog on 

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Sign in to follow this  



  • Popular Now

×
×
  • Create New...