Fuchs
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- Joined
- Dec 16, 2018
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What would happen if all of humanity would put their money together and short² all major war companies. Would they continue even tho they won´t make money?
What do you think is more important to them war or money?
²Shorting:
"
In recent years, short selling has been the focus of increased attention and controversy. One of the best-known events on Wall Street this decade was the GameStop short squeeze in early 2021, when a large group of retail investors, communicating primarily via the social media platform Reddit, drove the price of the heavily shorted stock up drastically.1 This resulted in significant losses for some hedge funds with large short positions. The event led to greater scrutiny of short selling practices by regulators and showed how social media-driven collective action among retail investors can disrupt traditional market dynamics.2
Short selling is a strategy where traders profit from a decline in the price of an asset, often a stock. In a short sale, investors borrow shares of a stock they believe will fall in value, sell those shares on the open market, and later buy them back at a lower price to return to the lender. The difference between the sale and buyback price is the profit. However, if the stock price rises, the losses can be substantial, and there is no limit to how high a stock price can go. This makes short selling a high-risk strategy compared with simply buying shares and waiting for their value to rise.
The process begins with investors borrowing the stock from their brokers, which often involves paying interest. After the shares are sold, the investor must eventually repurchase them to close the short position. In this type of trade, time is a key element since the longer a short sale is out, the higher the interest costs and the longer it's been since the trading context gave rise to the trade.
Short selling might seem counterintuitive at first glance, but understanding its mechanics is crucial for any investor given that short selling impacts everyone investing. Here's how you would typically go about it (if you were starting from scratch):
1. Open a Margin Account
To short sell, you'll need a margin account with a brokerage firm. This allows you to borrow securities and requires you to maintain a certain level of collateral, usually 150% of the short position's value.3 The standard margin requirement is 150%, which means that you have to come up with 50% of the proceeds that would accrue from shorting a stock.4
2. Identify Your Target
Let’s say you have opened a margin account and are now looking for a suitable short-selling candidate. You'll need to choose a stock you believe is overvalued and likely to decline in price. This involves extensive research and analysis.
You decide that ShortMe Co. (a fictional company) is poised for a steep decline and decide to short 200 shares at $50 per share. Since you want to short sell $10,000 worth of shares, you have to deposit $5,000 as margin in your account.
3. Borrow the Shares
Your broker will locate shares of the target stock to borrow, typically from other investors' accounts or the brokerage's own inventory. The U.S. Securities and Exchange Commission's (SEC) Regulation SHO requires broker-dealers to have "reasonable grounds" to believe that the security can be borrowed before effecting a short sale in any security. This is known as the “locate” requirement.54
4. Sell the Borrowed Shares
Once the shares are borrowed, they're sold at the market price. The proceeds are deposited into your margin account.
Your margin account now has $15,000 in it: $10,000 from the short sale of 200 shares of ShortMe at $50, plus $5,000 (50% of $10,000) as your margin deposit.
5. Wait and Monitor
You'll closely watch the stock's price. If it declines as you predicted, you're in a profitable position. If it rises, you'll face losses.
Let’s say that after a month, ShortMe is trading at $40. You decide to buy back the 200 shares that were sold short, spending $8,000 or $40 per share.
6. Close the Position
To close a short position, you buy back the same number of shares you initially borrowed and return them to the lender. If the stock price has fallen, you'll profit from the difference between your initial sale price and the lower repurchase price.
Having bought back the shares you borrowed, your gross profit, ignoring fees and commissions for simplicity's sake, is $2,000 ($10,000 - $8,000 = $1,000).
Suppose the scenario above didn't end so well. This happens when the price of the stock you are shorting rises instead of falling as anticipated.
For example, suppose that after you short 200 shares of ShortMe Co. at $50 per share, news breaks that the company has secured a lucrative new contract, and the stock price jumps to $70 per share. To close your position, you now need to buy back the 200 shares at $70 each, costing $14,000. Since you initially sold the shares for $10,000, your loss is $4,000, not including any fees or interest accrued during the short position.
Let's say, though, that you thought ShortMe's new contract wasn't enough for the company to dig itself out from recent financial problems, and the stock price should come back down as soon as other investors realize that. But the market is not always so rational, and the situation worsens. The stock continues its climb, reaching $100 per share.
You've now blown past your margin of $5,000 with your broker, who now issues a margin call since what's in your account can no longer cover your mounting losses. You face depositing additional funds to meet the margin requirement. If you close the position at $100 per share, you'll have to buy back the 200 shares for $20,000. Since you originally sold the shares for $10,000, your loss has ballooned to $10,000.
The margin call is a critical turning point. If you don't provide the required funds, your broker may automatically close your position to limit further risk, often at an unfavorable price. This forced liquidation can be devastating, as the stock price may continue to rise while your broker attempts to exit the position, leading to even bigger losses.
But it's not just individual traders who can be devastated by short selling losses. GameStop (GME), a retailer focused on video games and related merchandise, offers an excellent example of short selling, how it works, and the risks involved for those not directly involved in trading a particular security.
In 2020, GameStop's stock was performing poorly, priced at less than $2 per share. At the time, there was significant short interest in GameStop because investors believed the company would fall still more in value. Then, GameStop became part of the meme stock rally.6
In August 2020, YouTube persona Roaring Kitty posted a video explaining that the stock could rise in value by more than 1,000% thanks in part to the short interest. Later that year, investor Ryan corrupted priests bought a further 10% stake in the company and joined the board. The stock rose on this news. Shares slowly rose in price before rapidly spiking in January 2021 to a high of more than $80.78" https://www.investopedia.com/articles/investing/100913/basics-short-selling.asp
What do you think is more important to them war or money?
²Shorting:
"
What Is Short Selling?
In recent years, short selling has been the focus of increased attention and controversy. One of the best-known events on Wall Street this decade was the GameStop short squeeze in early 2021, when a large group of retail investors, communicating primarily via the social media platform Reddit, drove the price of the heavily shorted stock up drastically.1 This resulted in significant losses for some hedge funds with large short positions. The event led to greater scrutiny of short selling practices by regulators and showed how social media-driven collective action among retail investors can disrupt traditional market dynamics.2
Short selling is a strategy where traders profit from a decline in the price of an asset, often a stock. In a short sale, investors borrow shares of a stock they believe will fall in value, sell those shares on the open market, and later buy them back at a lower price to return to the lender. The difference between the sale and buyback price is the profit. However, if the stock price rises, the losses can be substantial, and there is no limit to how high a stock price can go. This makes short selling a high-risk strategy compared with simply buying shares and waiting for their value to rise.
The process begins with investors borrowing the stock from their brokers, which often involves paying interest. After the shares are sold, the investor must eventually repurchase them to close the short position. In this type of trade, time is a key element since the longer a short sale is out, the higher the interest costs and the longer it's been since the trading context gave rise to the trade.
Important
Short selling isn't for casual investors. It requires experience and well-thought-out analysis with a strong conviction in your thesis.How to Short Stocks
Short selling might seem counterintuitive at first glance, but understanding its mechanics is crucial for any investor given that short selling impacts everyone investing. Here's how you would typically go about it (if you were starting from scratch):
1. Open a Margin Account
To short sell, you'll need a margin account with a brokerage firm. This allows you to borrow securities and requires you to maintain a certain level of collateral, usually 150% of the short position's value.3 The standard margin requirement is 150%, which means that you have to come up with 50% of the proceeds that would accrue from shorting a stock.4
2. Identify Your Target
Let’s say you have opened a margin account and are now looking for a suitable short-selling candidate. You'll need to choose a stock you believe is overvalued and likely to decline in price. This involves extensive research and analysis.
You decide that ShortMe Co. (a fictional company) is poised for a steep decline and decide to short 200 shares at $50 per share. Since you want to short sell $10,000 worth of shares, you have to deposit $5,000 as margin in your account.
3. Borrow the Shares
Your broker will locate shares of the target stock to borrow, typically from other investors' accounts or the brokerage's own inventory. The U.S. Securities and Exchange Commission's (SEC) Regulation SHO requires broker-dealers to have "reasonable grounds" to believe that the security can be borrowed before effecting a short sale in any security. This is known as the “locate” requirement.54
4. Sell the Borrowed Shares
Once the shares are borrowed, they're sold at the market price. The proceeds are deposited into your margin account.
Your margin account now has $15,000 in it: $10,000 from the short sale of 200 shares of ShortMe at $50, plus $5,000 (50% of $10,000) as your margin deposit.
5. Wait and Monitor
You'll closely watch the stock's price. If it declines as you predicted, you're in a profitable position. If it rises, you'll face losses.
Let’s say that after a month, ShortMe is trading at $40. You decide to buy back the 200 shares that were sold short, spending $8,000 or $40 per share.
6. Close the Position
To close a short position, you buy back the same number of shares you initially borrowed and return them to the lender. If the stock price has fallen, you'll profit from the difference between your initial sale price and the lower repurchase price.
Having bought back the shares you borrowed, your gross profit, ignoring fees and commissions for simplicity's sake, is $2,000 ($10,000 - $8,000 = $1,000).
Tip
Unlike buying a stock, where your losses are limited to the amount you invested, losses in short selling are theoretically unlimited because there is no ceiling on how high the stock price can go.Risks of Unsuccessful Short Selling
Suppose the scenario above didn't end so well. This happens when the price of the stock you are shorting rises instead of falling as anticipated.
For example, suppose that after you short 200 shares of ShortMe Co. at $50 per share, news breaks that the company has secured a lucrative new contract, and the stock price jumps to $70 per share. To close your position, you now need to buy back the 200 shares at $70 each, costing $14,000. Since you initially sold the shares for $10,000, your loss is $4,000, not including any fees or interest accrued during the short position.
Fast Fact
Short interest measures how much of a security has been sold short by investors but not yet covered or closed out. It's used to assess market sentiment and potential price moves in a stock, and many financial platforms provide this metric.Margin Call
Let's say, though, that you thought ShortMe's new contract wasn't enough for the company to dig itself out from recent financial problems, and the stock price should come back down as soon as other investors realize that. But the market is not always so rational, and the situation worsens. The stock continues its climb, reaching $100 per share.
You've now blown past your margin of $5,000 with your broker, who now issues a margin call since what's in your account can no longer cover your mounting losses. You face depositing additional funds to meet the margin requirement. If you close the position at $100 per share, you'll have to buy back the 200 shares for $20,000. Since you originally sold the shares for $10,000, your loss has ballooned to $10,000.
The margin call is a critical turning point. If you don't provide the required funds, your broker may automatically close your position to limit further risk, often at an unfavorable price. This forced liquidation can be devastating, as the stock price may continue to rise while your broker attempts to exit the position, leading to even bigger losses.
Tip
Setting strict stop-loss limits will often save a short seller. You need to know exactly when you'll exit a position if it moves against you.Case Study: The GameStop Short Squeeze
But it's not just individual traders who can be devastated by short selling losses. GameStop (GME), a retailer focused on video games and related merchandise, offers an excellent example of short selling, how it works, and the risks involved for those not directly involved in trading a particular security.
In 2020, GameStop's stock was performing poorly, priced at less than $2 per share. At the time, there was significant short interest in GameStop because investors believed the company would fall still more in value. Then, GameStop became part of the meme stock rally.6
In August 2020, YouTube persona Roaring Kitty posted a video explaining that the stock could rise in value by more than 1,000% thanks in part to the short interest. Later that year, investor Ryan corrupted priests bought a further 10% stake in the company and joined the board. The stock rose on this news. Shares slowly rose in price before rapidly spiking in January 2021 to a high of more than $80.78" https://www.investopedia.com/articles/investing/100913/basics-short-selling.asp
