I will repeat myself again that this stock is certainly NOT a classic short play, but I will attach an explanation on shorting. Basing investment decisions on published short positions is ludicrous as only uncovered shorts must be reported!
The way short-selling works is as follows:
1. Lets say I own 1000 PYT, which are in my account with Brokerage firm A.
2. You are an investor with Brokerage firm B, and you wish to sell short 1000 PYT. Let's say that PYT is selling for $5.00 when you want to do this.
3. You will have to "borrow" 1000 PYT in order to do this. Firm B will attempt to borrow the shares from another client of firm B who owns 1000 PYT. If they cannot find anyone who owns PYT, they will phone other firms. So they phone firm A, and borrow 1000 PYT from firm A, which are the 1000 I own myself. So, in effect, I lent you 1000 shares so that you can sell them.
4. You receive $5000 from the sale, but you cannot touch this money. You have to keep it in the account, and, in addition, put up another $5,000 cash of your own to meet the margin requirements of 200% of market value.
5. If PYT goes down in the same afternoon by $1.00, you can repurchase them and close the short position. You make $1,000 profit. If PYT goes up by $1.00, you have a paper loss of $1,000, but, what is even worse, you have to deposit another $2,000 into your account to meet the 200% margin requirement. If PYT goes up by several dollars, things can get really ugly if you are short, as you will either have to buy back higher, or keep depositing 200% of your loss into your account on the spot.
6. Now comes the interesting part: if I ask my broker at firm A to arrange to give me a stock certificate, then you have to "return" my 1000 shares to me. Your broker at firm B will have to phone around to find someone else to lend you 1000 shares. All this happens in the background and if your broker found someone else to lend the shares to you, you will never know what happened. However, if your broker cannot find anyone else who owns PYT shares which can be lent out (see #8 below), you will be forced to buy them back, right then and there, at whatever price PYT is trading at that time; probably a nasty surprise, to say the least.
7. Now imagine that instead of you and me, it is a firm with $ millions of capital that is shorting, say, 100,000 PYT. As firms, they are NOT subject to a 200% margin requirement but a more lenient requirement. In most cases, they do not tell the VSE that it is a short (uncovered vs covered), so as to avoid the margin requirement altogether. But they still have to borrow the shares from individuals like us. Borrowing 100,000 shares can be difficult, but not impossible in PYT's case; they just get a little from every small investor. NOTE: uncovered shorts MUST be reported while covered shorts MAY be reported.
8. The following shares CANNOT be lent out:
- Shares in self-directed RRSPs (due to legislation)
- Shares issued in certificate form
The following shares CAN be lent out:
- Shares in your brokers (street) name in a non-RRSP account (NOTE: many discount brokers are prohibited from lending or shorting eg. TD Greenline)
Note: I believe that when you open a margin account with the broker you agree to allow your broker to lend out any shares you are long in your account and which are registered in street name. So your broker does not need your permission to do this, since you have already agreed to it in the account agreement when you opened your account. Only by having the shares registered in your own name your shares would become non-lendable.
9. If everyone who has non-RRSP shares in their broker's account were to call their broker tomorrow and ask for their share certificate, all of a sudden the shorts would have the rug pulled from under them, as they would have to return their borrowed shares. Of course, getting your share certificate could mean a small service charge and having to put in in your safety deposit box. Also, if your broker has given you 50% margin when you bought PYT (most brokers do not), you will have to pay back the margin before the broker will deliver you a certificate. Someone owning under 1,000 PYT would not want the inconvenience; but large shareholders in this situation would be greatly advised to take delivery of their shares. I assume that the management of PYT has made sure that their PYT shares could not be lent out. Everyone who has PYT in their RRSP is OK too. By the same token, because there is a broker involved, you have to wait until the broker receives PYT's annual report/proxy materials and then sends it to you, so you will receive it after everyone else has. M Jacobs has requested everyone in this category to register with the company.
Anyway, a significant portion of the investment firm's profit is derived from trading stocks for their own account. They can go either long or short in any stock; whatever strategy works for them. Shorting works very well for some firms who specialize in this technique, and PYT, with its daily 10% fluctuations, is a perfect candidate (right now) for daily profits from fluctuations. They can also cause a stock to go down and then buy it back lower; they become both the cause and effect: a self-fulfilling prophecy.
You can assume that the shorts know everything that you and I know about PYT, and probably more. They too talk to the company and read the Internet, and they are aware of PYT's projects. That gives them, at least in theory, a limited window of opportunity to feast themselves further. I am sure they have calculated that risk, and are, or will be, acting accordingly. Shorts are very smart individuals; they have to be for their own sake, and they are not easily defeated.
Happy Investing |
