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Politics : Formerly About Advanced Micro Devices
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To: TimF who wrote (105219)4/13/2000 7:24:00 PM
From: tejek  Read Replies (3) of 1575121
 
Ted, I still must not understand shorting. Why would you have to keep shares? Wouldn't you buy them and then have to return them.

Originally you borrow them from your broker. You buy them only when you cover (end the short)which means you buy them at the current price. Then they are yours with which to do whatever you want just like if you had gone long in the first place.

You sell shares you don't have but then buy them later.

No, you borrow the shares when you start the short. You can only sell them after you have covered (ended your short) and then bought the shares.

If the stock goes down you buy back for less, if it goes up you have to pay more and you lose money but I still don't see how you would be stuck with the share.

Imagine a scenario where you short a stock and the price goes up not a little but a lot. When that happens its typically because the stock float is small and the shorts, by borrowing so many shares, have reduced the tradable float to almost nada. So you started the short at $70 and now its at $120. Now one of the fund mgrs. looks at the price of $120, thinks the stock is overvalued and decides to dump his shares and take a profit. Suddenly the stock's liquidity goes from zilch to too many shares in the market at one time....what happens: the price collapses. Now this happens very quickly, so that by the time you react the price can be all the way down to $80. You've lost major bucks and remember the stock got so high (to $120) only because so many were shorting it so you know that its not likely to get back up to $120 anytime soon.

I hope its clearer now.

ted
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