What is “Selling Short?” I’m so glad that you didn’t ask. Selling short is the method that traders use to make money in a bear market.
Perhaps you’ve heard the terms “Bear Market” and “Bull Market” before. If you have, but still have no clue what it means, a “Bull” market is when the market is rising, like for instance when it’s being artificially inflated by manipulation and greed. A “Bear” market is when the market is falling, like for instance when we turn the lights on and the roaches scatter off the N.Y.S.E. trading floor and then park their millions in tax-free, off-shore accounts in the Cayman Islands.
If you want a handy little way to remember which is which, think of it in terms of how the animals attack. A bull lunges upwards with his horns and a bear swipes downward with his claw.
Now you may think that the way to make money in the stock market is to buy low and sell high like you learned in a basic economics class. Buy a hundred shares of a stock at $10 per share, sell them at $12 (“Bullish”) and you have $200 (minus commisions, fees and taxes). By contrast, if those same shares drop to $8 per share (“Bearish”), you just lost $200. Well that sucks!
If only there were a way to profit off of your loss. So some very bright guys found a way to make money even when the stock market tanked and they called it “Selling Short.” Allow me to illustrate:
Let’s say that, instead of betting that a stock will rise, you’d like to bet that the stock will fall (a pretty safe bet in a market like this, wouldn’t you say?). Using the example above, a short seller will borrow 100 shares of the stock at $10 per share with the promise to buy them at a later time. They then sell the borrowed stock at the current value and now they have $1000. But remember, they promised to actually buy the stocks later. Then, WHOOPEE!, the stock price drops to $8 per share. This seems like a good time to pay for them, doesn’t it? And so the short seller pays for them out of his $1000. But, because he only has to pay $800 for the hundred shares he promised to buy, he makes a cool $200 off the $200 you lost.
Why should this piss you off while you open the envelope containing the smoldering remains of your 401K?
Short selling is not a neutral bet; like simply choosing heads or tails in a coin flip. While the market may fall naturally (Pop Quiz: Falling market, bull or bear?), the practice of Short Selling is, after all, selling, which drives stock value down (the profitable direction for the short seller, by the way). In essence, short selling straps a jet pack to the decline, (what could be scarier than a bear with a jet pack?) and because people are profiting (not you, of course, but somebody), from the standpoint of the short seller, there’s no reason to stop it.
In conclusion, all that money that flew out of your pockets as you screamed down the latest hill of the Economic Roller Coaster wound up in someone else’s bank account.
Just thought you might want to know. Oooo! Gotta go; American Idol is on!