Finance Stuff Mechanics of Shorting a Stock Joe Nau

What is Short Selling?  When does it mean when an investor “goes long”?  When an investor goes short, they anticipate a decrease in share price  What happens when you buy shares of a company?  An “intermediary” (a broker) matches buyers with sellers for a small commission  So what happens when you short sell a stock? 1. Borrow the stock from your broker 2. The stock is immediately sold on the open market and you receive the money 3. Pay your broker any dividends that occur while the position is open 4. To close the position, buy the shares on the open market and give them back to your broker

1. Borrow the Stock from a Broker  Billy thinks Herbalife’s business model is a Ponzi Scheme and they should be worth nothing  Billy decides to short sell Herbalife  He borrows 100 shares of Herbalife at $50/share from his broker who either had Herbalife shares on hand or took them from another client’s account  Billy deposits (100*$50)*50% in his margin account so that if he can’t give the broker back their shares they can take $ from his margin account

3.) You get $$$  The broker immediately sells the stock Billy want to short and they give Billy the proceeds  Billy does what he wants with the $$$

3.) Billy Pays his Broker any Dividends  Herbalife issues a $1/per share dividend  Billy has to give his broker $1*100 = $100

4.) Billy closes out his short  Herbalife shares go from $50 to $60  Billy is sad and decides to close out his position  Billy buys 100 shares for $60 and gives them back to his broker  Billy lost $1,000 dollars Why does this always happen to me?

Dangers of Short Selling  Example: If you bought $1000 of a stock the most money you can lose is $1000  If you shorted $1000 of stock, and the price went up 300%, you would lose $3000  Borrowing stock from your broker isn’t free  Risk of short squeezes  Long-term market trend  Getting choked out by Uncle Carl

(OF SHORT SELLING) 2

Classic Ackman  Bill Ackman has a huge short on Herbalife because he claims it’s business model is illegal  He hosts an event where he promises to show “Enron-style fraud”  Presentation is really boring and nothing new is brought up  Stock shoots up 22% that day and Ackman sums up event with “My bad”

The E-Trade Debtor  Joe Campbell goes to bed one evening with $37,000 in his E-Trade account with an open position shorting the shares of KalosBios Pharmaceuticals  Wakes up owing E-Trade $106,  KalosBios was on the brink of bankruptcy when that night Martin Shkreli (Yes, that guy) acquired a control of a majority of the shares, reducing the risk of bankruptcy by a lot  Stock shoots up 800%  Joe makes a GoFundMe and gets $5,000 but will probably have to liquidate his 401(k) and his wife’s too (if she doesn’t divorce him)

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