Friday, Sep 12 1997 12:37PM EST
Reply #6475 of 12481
Geez!!! I feel like a school teacher here!!! :) Here is a quick and easy to understand explanation: (keep in mind, all the numbers I use will be hypothetical for the sake of simplicity:
XYZ corporation has 1,000,000 shares outstanding. Insiders(ie. pres., CEO, CFO, Directors, etc.) own 900,000 shares, therefore the FLOAT is 100,000 shares.
Keep in mind, that the 900,000 shares that are owned by the insiders are all in their possession, in other words, their stock certicates are located at their homes and in safe keeping, meaning the DTC (Depository Trust Corporation) does not have them.
The DTC only has 100,000 shares, which is the effective float.
Now, over the past 1 to 2 years, the MM have been shorting stock to new buyers, however, given the sad state of the company, they figure that they can short and never have to cover by continuously short selling the stock to new investors who want to buy, since they don't have or even need to keep an inventory. This action prevents the stock from going up and gives the illusion of liquidity when there isn't any. Once the retail buying dries up they short the stock to themselves and simultaneously covering thereby creating a "CHURN" while lowering the price.
In the process of shorting the stock to retail clients without coming up with the required borrowed stock they are effectivley creating more stock that was not authorized by the company. How can that happen you say? Well, thats why the process of Naked or undeclared short selling is illegal. They are shorting(selling) YOU , in the investment public, stock that was created by them.
back to my example above:
Lets now say that through the process of Naked shorting the stock to legitimate retail buyers(you and Me) there are now 3,000,000 shares in the public hands or "float". In other words , (you and me) now own 3,000,000 shares of XYZ corporation, when the "float" is supposed to be just 100,000 shares.
Now the owners of the 3,000,000 shares decide to take delivery of their stock certificates. They call their brokers and put in the request. The broker then sends the request to the Transfer agent who begins the transfer from the"brokerage name" to your own name. Well, the transfer agent begins to issue certs, however when the reach 100,000 shares their computer stops printing certicates because the legal authorized(by XYZ corp) share limit has been reached.
So what happens next? Simple, The transfer agent then calls up the MM and tell them that there are an extra 2.9 million shares and they have 3 business days to eliminate those shares. Now the MM has 2 options:
1) call XYZ corp. and plead their case to them and ask if they please issue 2.9m more shares or,
2) they would have to go in an buy 2.9 shares in the open market, this will in effect skyrocket the stock because they are trying to buy in a market that has the float completely taken up. So in order for the people to loosen the hold on their shares, they have to continousluy increase the price.
Hope that explantion helped ( sorry about mis spelled words and typos as I am late for a meeting and must go.
Regards
Tom |
