October 10, 2005

• No kidding! What's the catch? Can these stocks really be shorted?
• This is cool. Explain shorting, please, for the stocktard.
• Basically, in the stock market, you want to buy low and sell high, but you don't necessarily have to do it in that order. When you short a stock, you borrow it from someone that owns it (or, in the parlance, is long in the stock) and sell it, betting that you will be able to buy it cheaper at a later date. It's a risky move for 2 reasons. First, the owner of the stock could decide to sell it before you are ready to buy the stock to replace the borrowed shares, so you give up some control. Second, and more importantly, is that there is no limit to the amount you could lose if the stock starts going up.
• What woogie said. I would just add that typically the brokerage is the one you're borrowing the stock from.
• And, going long on a stock means that you borrow now at an apparetnly low price and hope like hell the price will at which you can sell it is multibles about the amount you "borrowed" it at.
• Yeah, it confuses me, too.
• Actually, "going long" simply means that buying is the first transaction. You don't have to borrow money to go long on a stock, you simply have to buy it first. This is what most people do in the stock market. Think of this example... most people buy a house with the idea that it'll go up in value. This is "going long". The company that sold the house is "going short", if you think of them having the hope that they will buy it back later at a lower price.
• Thanks for this post, techsmith. I'm an investor hound, i loves this stuff. If you're a knowledgeable techie, you can make good money shorting dumb tech stocks (e.g. SCO). The problem is as woogie mentioned, the unlimited loss potential. I experienced that first hand when I shorted a tech stock back in the Y2K days. This loser of a company claimed it had a product that would automatically perform Y2K conversions for you. Me and my buddies checked into it and it was scamware. I shorted the sucker and then guess what? Someone on the market floor circulated a ludicrous rumor that George Soros was going to buy the company. The stock shot up 200% in several days. I had to bail, triggering the worst loss I've ever experienced on the markets. The other great illustration of what can go wrong was during the dot-com boom when pieces of crap (as Henry Blodget called them) refused to belly under. Shorters of those stocks were cleaned out. The safer way to play bad tech stocks is to buy put options. I did this with JDS Uniphase and Yahoo in 2001 and I can't complain.
• No kidding! What's the catch? Can these stocks really be shorted? Typically the answer is no. There are usually limits on short selling low-priced stocks. Then there is also the tricky matter of finding the stock to borrow in the first place, if the stock is a thinly traded issue.