Download History of the Stock Market

Short Sell in the
Stock Market
Mr. Henry
AP Economics
What does “short sell” mean?
• When an investor goes long on an investment,
it means that he or she has bought a stock
believing its price will rise in the future.
Conversely, when an investor goes short, he or
she is anticipating a decrease in share price.
Short Selling
• Short selling starts with borrowing a stock from your
broker
• You sell the borrowed stock hoping to buy it back at
a lower price and return (short cover) it to your
broker for a profit
• Short selling is the selling of a stock that the seller
doesn't own. More specifically, a short sale is the
sale of a security that isn't owned by the seller, but
that is promised to be delivered. That may sound
confusing, but it's actually a simple concept.
• When you short sell a stock, your broker will lend
it to you. The stock will come from the
brokerage's own inventory, from another one of
the firm's customers, or from another brokerage
firm. The shares are sold and the proceeds are
credited to your account. Sooner or later, you
must "close" the short by buying back the same
number of shares (called covering) and returning
them to your broker. If the price drops, you can
buy back the stock at the lower price and make a
profit on the difference. If the price of the stock
rises, you have to buy it back at the higher price,
and you lose money.
Example: Short Selling and Covering
I feel that IBM stock is going to go down
and want to short sell the stock.
• I borrow the stock from the broker (2%
brokerage fee)
• I sell it. Now I’ve got cash.
• I short cover by buying the stock back
in the stock exchange at a lower price
Example: Short Selling and Covering
•
I return the stock to the broker (2%
brokerage fee).
•
I get the difference between the high
price and the low price minus the
brokerage fees.
Note: it’s important to remember that you borrow the stock
from a broker and return the stock. You do not give the broker
any money (except for brokerage fee).
Splits?
• Say you had a $100 bill and someone offered you
two $50 bills for it. Would you take the offer? This
might sound like a pointless question, but the
action of a stock split puts you in a similar position.
• A stock split is a corporate action that increases the
number of the corporation's outstanding shares by
dividing each share, which in turn diminishes its
price. The stock's market capitalization, however,
remains the same, just like the value of the $100 bill
does not change if it is exchanged for two $50s. For
example, with a 2-for-1 stock split, each stockholder
receives an additional share for each share held, but
the value of each share is reduced by half: two shares
now equal the original value of one share before the
split.
• The first reason is psychology. As the price of a stock gets
higher and higher, some investors may feel the price is too
high for them to buy, or small investors may feel it is
unaffordable. Splitting the stock brings the share price down
to a more "attractive" level. The effect here is purely
psychological. The actual value of the stock doesn't change
one bit, but the lower stock price may affect the way the
stock is perceived and therefore entice new investors.
Splitting the stock also gives existing shareholders the
feeling that they suddenly have more shares than they did
before, and of course, if the prices rises, they have more
stock to trade.
• Another reason, and arguably a more logical one, for
splitting a stock is to increase a stock's liquidity, which
increases with the stock's number of outstanding shares.
What advice did
you find?