Facebook Follies of Friends and Families

[Malthus]

Why exactly does short selling invite such disdain?  It seems to be like it's a necessary part of price discovery.  The only issue I can see with that is if short-selling is a massive effort designed to create a self-fulfilling prophecy by causing some sort of liquidity event out of the blue.

Two reasons: first, people don't understand the value of it - it seems like betting for someone else to fail, rather than betting that they succeed, which seems to be inherently mean-spirited.

More importantly, the suspicion exists that the short sellers are not merely passively betting on failure, but betting on failure them taking active steps to ensure that failure happens.

[Razgovory]

Apparently people on Reddit have been buying up Gamestop shares to stick it to some rich assholes short-selling.

See, you lost me right there.  I don't know what short-selling is.

[HisMajestyBOB]

Apparently people on Reddit have been buying up Gamestop shares to stick it to some rich assholes short-selling.

See, you lost me right there.  I don't know what short-selling is.

Watch the movie Trading Places.

[The Brain]

Apparently people on Reddit have been buying up Gamestop shares to stick it to some rich assholes short-selling.

See, you lost me right there.  I don't know what short-selling is.

Don't sell yourself short.

[Malthus]

Apparently people on Reddit have been buying up Gamestop shares to stick it to some rich assholes short-selling.

See, you lost me right there.  I don't know what short-selling is.

It's a risky technique for making money on the fall in price of a stock.

Way it works is, I (the short seller) borrows a stock someone else owns. I sell it at the current market price. I am legally obligated to give it back to the person I borrowed it from, at a set date in the future. To do that, I must buy the stock on that date at the price it happens to be then. I am hoping that the price goes down. If it does, I have made some money (the present day price minus the future price).

What happens when the price goes up? Then I lose money. Unfortunately for me, if I bought a lot of stock to short, or other people did, there may be a situation where a lot of people have no choice but to buy - driving the price up artificially. This is a "short squeeze" and if it happens the short sellers get screwed. 

[Razgovory]

Apparently people on Reddit have been buying up Gamestop shares to stick it to some rich assholes short-selling.

See, you lost me right there.  I don't know what short-selling is.

Watch the movie Trading Places.

You can't make me!

[Darth Wagtaros]

Apparently people on Reddit have been buying up Gamestop shares to stick it to some rich assholes short-selling.

See, you lost me right there.  I don't know what short-selling is.

Watch the movie Trading Places.

You can't make me!

We will drive the fuck to your house, plug in a VCR, pop in the tape, and then do some Clockwork Orange shit to force you to watch it through. At which point we will  have a quiz to make sure you absorbed its message. 

[crazy canuck]

Apparently people on Reddit have been buying up Gamestop shares to stick it to some rich assholes short-selling.

See, you lost me right there.  I don't know what short-selling is.

an example of Malthus' explanation.


shares are trading at 100, you think they are going to go down to 50 so you short them:

You borrow 1000 shares with a promise to give them back on a date which is not very long in the future (x date)
You immediately sell those shares, so you have 100,000 in cash (lets forget about the fees and interest for simplicity)

Now you watch and wait.

Scenario A - things work out as you guessed it would.  The share value drops to 50 and you purchase 1000 shares at that price to give them back on x date.  That costs you 50,000 and you keep the remaining 50,000.  You count yourself lucky.

Scenario B - You guessed wrong.  The shares don't drop but don't go up too much so when you purchase the shares you don't have to spend too much more than the 100,000 you have.  You thank your lucky stars you did not lose more and you learn not to short stocks.

Scenario C - You really got it wrong.  The share value goes up sharply.  You realize that in order to reduce your losses you need to start buying well before the buy back date so that you can stop your losses.  If there are a number of people in your position the share value goes up even higher because all the short sellers are in effect panic buying.

The main risk with shorting a stock is that your loses are limited only to how high the value of the shares go before you repurchase.  If you buy a stock your loss is limited to the amount you spent.

[ulmont]

The main risk with shorting a stock is that your loses are limited only to how high the value of the shares go before you repurchase.  If you buy a stock your loss is limited to the amount you spent.

An interesting collorary is that your gains from a short sale are limited to the amount you initially sold from borrowed stock; if the stock goes to $0 you still can't make more than that first sale.  Long bets, on the other hand, have heoretically unlimited upside.

[crazy canuck]

The main risk with shorting a stock is that your loses are limited only to how high the value of the shares go before you repurchase.  If you buy a stock your loss is limited to the amount you spent.

An interesting collorary is that your gains from a short sale are limited to the amount you initially sold from borrowed stock; if the stock goes to $0 you still can't make more than that first sale.  Long bets, on the other hand, have heoretically unlimited upside.

exactly, limited gain with unlimited loss potentials.  Needless to say, I have never shorted a stock.

[DGuller]

Limited upside and unlimited downside is all just a payout pattern.  My industry is all about limited upside (your premium) in exchange for potentially catastrophic downside (a really huge lawsuit judgment, for example).  You just have to make sure you're properly balancing the two, including the tail risk.  I'll take a bet with $5 upside and $100 downside if I get the upside 99% of the time.

[crazy canuck]

Limited upside and unlimited downside is all just a payout pattern.  My industry is all about limited upside (your premium) in exchange for potentially catastrophic downside (a really huge lawsuit judgment, for example).  You just have to make sure you're properly balancing the two, including the tail risk.  I'll take a bet with $5 upside and $100 downside if I get the upside 99% of the time.

Sure, and that is what hedge funds are all about. 

But we are talking about individual investors.  Context.....

[alfred russel]

Limited upside and unlimited downside is all just a payout pattern.  My industry is all about limited upside (your premium) in exchange for potentially catastrophic downside (a really huge lawsuit judgment, for example).  You just have to make sure you're properly balancing the two, including the tail risk.  I'll take a bet with $5 upside and $100 downside if I get the upside 99% of the time.

Sure, and that is what hedge funds are all about. 

But we are talking about individual investors.  Context.....

It is plenty appropriate for individual investors who know what they are doing.

For example: A really small company I knew very well had two classes of publicly traded stock. The Motley Fool ran a story about how the company was going to go through the roof, but only referenced one of the two classes. That class of stock took off, while the other class didn't move so much. I understood the differences between the classes of stock, which really didn't justify a major difference in price (and there hadn't been one historically).

I went long the class of stock that didn't move much, and shorted the stock that had gone up like a rocket ship. I ended up with like a 30% return in a few months.

[alfred russel]

exactly, limited gain with unlimited loss potentials.  Needless to say, I have never shorted a stock.

"Unlimited loss potential" is just the corollary to the "unlimited gain potential" of a long position / the guy buying a share of Gamestop and extrapolating that "might" turn him into a trillionaire.

To use Gamestop as an example, they had 65 million shares outstanding (almost certainly higher now, with stock option exercises and possibly new issuances, but lets hang with the low number). Amazon has a market cap of $1.6 trillion. The idea that Gamestop would ever get a market cap is obviously absurd and won't happen. But if it did, a short position on a share of Gamestop would leave you with a loss of ~$24,000, which while substantial, is still far short of "unlimited".

[Syt]