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Short selling


Jambothump

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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 ?

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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

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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 ?

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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.

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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..

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

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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

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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.

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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.

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Gorgiewave
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
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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 ?

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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. 

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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 ? ?

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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.

 

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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.

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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 

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Howdy Doody Jambo

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

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