Short Selling Slides Flashcards
Mechanics of Short Selling
When A wants to short a stock, she borrows from B and sells the stock to C
Suppose the stock sells for $100
C gives $100 to A
A gives this $100 to B
A has effectively lent $100 to B, and received a stock certificate as collateral
B typically pays a collateralized interest rate
When the loan is closed
B repays cash to A – including interest
A returns the shares to B
Rebate Rate
Acts as a price that equates supply and demand.
Another cost of shorting is finding shares to borrow
Days to cover is another cost that industry considers
Inability to Short
For some stocks if you want to short them but you cannot since there is no ability to find the shares to borrow from. No matter the price point you will pay
Unwillingness to short
Even if an investor is able to short sometimes they are unwilling to short. as seen that 98% of US stocks have a sub 5% short interest ratio. It is seen as unpatriotic and unamerican to do so. Inability and unwillingness to short have similar implications.
Risks of Short Selling
Risk of Price increase (unlimited potential downside to the position)
short squeeze although your position was inherently rational you were forced to close position at a loss.
Unamerican
Companies may sue for publicly shorting
Herbalife example
Shows how even sophisticated investors have differing opinions and how the dangers of short selling/ how emotions play a factor.
