To Jim D. and All - Subject: Shorting Stelax
I would like to share with everyone a mistake I have made that has not helped my long term investment in (STAX). I have held the stock in a marginable account. I never knew that by signing the margin agreement that my Stelax shares could be borrowed and used by another marketmaker to SHORT the stock. Anyone keeping shares of Stelax in a marginable account is working against themselves because they are giving market makers the right to short the stock. It makes no sense to keep any stock which has a value of less than $5.00 a share in a marginable account. The brokerage house won't let you borrow on it anyway.
There is currently over 1,000,000 shares of Stelax being shorted. If every shareholder of Stelax were to check to make sure they are not keeping their shares in a marginable account and if it is currently in a marginable account, start a new account and don't sign a margin agreement for that new account, we could start a short squeeze and eliminate market makers manipulating the stock.
I have gone one step further and have requested a large block of stock be put in my name and I am going to take possession of the certificates. I'm in this one for the long haul and don't want market makers shorting my shares. I have been told that it will be approximately 3 weeks before I receive my certificates. I guess this is to give the market makers time to cover or buy back the shares they have sold.
The following is taken from AOL's "The On Line Investor" under the subject of "Selling Stock Short":
On the other hand, if the stock is traded on the NASDAQ, no problem. Because there is no central exchange, different market makers will take your short sale on the bid side of the market, as long as they can borrow the stock to accommodate your sell. If the stock gets hit too much, they simply stop trading the stock until buyers return to the stock. The ability to borrow the stock is a big deal in shorting stock, both on the NASDAQ and the exchanges and here's what that means:
Borrowing Stock: When you enter an order to sell a stock short, you must tell the broker you're shorting the stock. The reason? The broker needs to be able to borrow the stock from someone so that it can deliver to the buying party the stock you want to sell. Think about it. You want to sell something to someone who wants to buy it. They want to own the stock. So you have to be able to deliver stock to the buyer. But you don't own the stock. You're shorting it. Where does the stock come from that the buyer gets? It comes from another account that has the stock and has signed a margin agreement with the broker. If an account has a margin agreement, it says, in the fine print, that the broker can borrow stock from the account to use for its own purposes. It's standard practice in the industry. That's why brokers like margin accounts. You should like them, too, because borrowing money in your margin account is probably the cheapest way to borrow money. However, having that margin account allows the broker to use the stocks in your account for its own purpose unless you don't give the broker that right. But most investors do.
So the broker can then go into an account, borrow the shares needed to fill the buy side of the trade (remember: the broker must deliver stock to the buyer of your stock within three business days of your trade). That's why you have to tell the broker you're selling the stock short. If the broker can't borrow the stock because there isn't enough stock around to borrow, then you won't be able to short the stock. Every broker keeps a list of stocks that are not eligible for shorting. Once you try to enter your order to sell short, you'll find out quickly if your stock is on that list. Usually, the smaller cap stocks are the ones that are hardest to short.
And that's about half the story behind shorting stocks. If you're considering doing this trade, be aware of some of the problems it can create for you. That's the other half of the story and will be in next week's column. |
