shorting stocks, who loses?

Discussion in 'Trading' started by z32000, Jul 28, 2007.

  1. z32000


    i'm trying to understand the who loses when stocks are shorted...

    first of all, I understand that in order for one to be able to short a stock... the brokerage firm has to be able to allow you short the stock first of all.

    So this must mean that the brokerage firm has purchased the stock from the market at one time.

    so as I understand it, when you short a stock, you are practically buying the stock from the brokerage firm at the current price and when the market prices starts to fall... you then sell back the stock to the brokerage firm at the current price.

    So basically, the brokerage firm still holds the stock but has lost money on it and those losses has transferred into your account.

    Is this correct? Then if so, wouldn't brokerage firms only hold shortable stocks that they plan to make profit in the long run. And wouldn't this also mean that a brokerage firm would never want to hold any shortable stocks that they feel won't ever be profitable?

    If this is the case, wouldn't this mean you can guage the likelyhood profit potential of a stock depending if a brokerage firm has it available for shorting?
  2. z32000



    So basically, the brokerage firm still holds the stock but has lost money on it and those losses has transferred as GAINS into your account


    From what I understand, the stock is physically sold. The brokage firm has to hold X percentage amount of shares of that stock before they can allow you to short it. You are actually selling someone elses shares at the brokage account.

    So when the stock is sold, that amount is placed into an account. When you decide to cover, the amount that was being held in the account is used to buy back the stock. The difference, either positive or negative is then charged to your account.

    So the brokerage does not lose any money.
  4. Sigh>>>>.

    The brokerage firm does no such thing. If you have a margin account, and your stock is properly hypothecated, they lend YOUR stock when the borrow goes through. It's in your margin agreement. They charge you a fee, interest, whatever, and a commission. Mother Theresa does not work for Merrill Lynch.

    They are not supposed to lend stock that is restricted, in a cash account, or has not been properly borrowed.

    Guess what I'm going to tell you next? They do anyway.
  5. Daal


    the losers are the people who are long the stock
  6. We expect that the cases against prime brokers will be fought tooth-and-nail by both sides. The financial industry cannot afford to lose. U.S. shareholders cannot afford to lose. Whatever the result, we believe a disaster is in the making. It won't be tomorrow, it won't be next month, and it may not be next year, but the system cannot indefinitely hold up against the creation of a nearly unlimited supply of shares. Something will eventually have to give.

    This explains it as well as anything, It was in Naked Short Selling Thread. Very good.
  7. hbiawos


    "i'm trying to understand the who loses when stocks are shorted..."

    In theory, no one loses. When you short a stock, you're borrowing it to sell and buy it back at a lower price.
    (Naked short selling is an entirely different that case you're shorting shares that don't exist.)
    Short sellers provide liquidity in the markets, guaranteed buyers for a stock that (theoretically) could go to zero, and a terrific source of income when squeezed.

    Short sellers are not naked short sellers. Not the same animal at all. Legitimate shorts gotten a bad rap for reasons that I don't entirely understand.

    The broker makes his commission, the long holder of the stock still holds it @ his purchase price, and the short, if he's talented, makes a little money practicing his entirely legal craft.

    Who loses?
  8. ronblack


    There is no such a thing as win-win in trading (non-zero sum). The owner of the shares loses if the short-seller wins by the same amount (minus expenses). If the short-seller loses, the owner of the shares wins.

    This is trivial. Short selling is a zero-sum game and this game is played by he long holder and the short seller. No way for a win-win.

  9. zdreg


  10. stock is borrowed, not purchased.

    If the stock goes down and you shorted, you make money and the longs lose... and vice versa
    #10     Jul 29, 2007