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Learn about Shorting Stock 2

Learn about Shorting Stock 2 Let’s review what we went over in the last video and one of you are actually commented that it would be a good idea to draw a time line so I’ll draw a time line. Short, so we’re learning about short selling and in the last example let me do the time line where things work out well fro the sellers. So let me draw the stock price of IBM, let me make this it’s, let me draw up fairly. Okay, here we go. So let’s say that this is -- oh, that could be our time line, that’s by day, let me draw the stock of IBM, it could look like something like -- let me discuss my Y axis -- let’s say the stock right is set a $100 straighten some place like that. And I -- and lets it does that later. But we’re sitting at this point here, we’re sitting it -- let’s call this day zero, day zero, so, what does the short seller do. So let’s say the short seller right now, let me see if I can draw his balance sheet. So, right now the short seller he has assets and liabilities, so short seller, short seller, his assets -- I won’t worry about collateral o requirements and all of that right now but usually he had already has to have some assets ahead of time to be able to borrow shares but actually let me give him some collateral ahead of time. So, let’s say that he already has $60.00 in his account. He has $60 of assets on day zero and then is the day that he says “you know what I’ve done my analysis and I think IBM” he hadn’t see this part of the stock price I mean it would be great if you did then you could short with conviction but all he sees is the past, if you did a stock track he would just see, let me do switch colors—he would just see this green part right here, he wouldn’t see all the stuff that ‘s in the future but he has a lot of conviction that IBM is going to go down. So what he does is he barrows a share of IBM on that day. So here, so then on this day he barrows one share, so you has, they call that IBM, one IBM. And he also owns one IBM, he owns one IBM. Right after you barrow it before you do anything you do it, you have does an asset and you also own it back and if you wanted to unwind the borrowing of it, you could just give it back. But what he does at this point is he sales this IBM. He sales that share and he gets a $100 for it because that was just the market price, that’s what people are willing to tread IBM shares for at that point in time. That’s day zero, and then let’s says IBM reports his earning and they are really bad, and that happen on probably happen on this day, IBM reports, IBM reports. And the stocks turns to go down, down, down, people take a long time to realize how bad the report was and here at this day, once the stock had has reach $50, our short seller says ”okay that’s enough, I don’t think the stock is going to drop a lot more” so in day -- let’s call this day ten, ten days are gone by. Day ten he decides to cover, so going into day ten this is his balance sheet, let me redraw it—so going into day ten what does he have, he has a $160.00, the $60.00 he had before, just by actually working. And he owns, this is his assets and his liability is he owns one share of IBM to the broker and the broker really owns it to one of the share holders of IBM who happen to be keeping the share with the broker and he wants to cover. So, what he does is he takes a $100.00, so he takes a $100.00 to, no, no, sorry he doesn’t take a $100.00, now the shares of IBM will only cost $50.00. So he takes $50.00 too buy a share, to buy one IBM, one IBM. So instead of a $160.00 he now a $110.00 and he ahs a share of IBM and then what he does is he takes the share of IBM and gives it to the brokerage to pay off his liability. So the he’s done, he’s left with no liabilities and just a $110.00 of assets. So he made $50.00, so hopefully that clears up, clarify that’s up a little bit and that he sold here and bought here, just the reverse of, lot of stock, it’s almost like you’re acting reverse time. But this was a very good scenario for the short seller but he very easily could have made a blunder and let’s see what could have been a blunderous scenario. So let me draw a different stock chart for IBM, so let me draw the stock up to the day in question and we said it was looking something like this where was trading right at around a $100.00 and this is the day that our sellers decides to shorten and this happens. He essentially barrow a share of IBM, so he has a one IBM share liability, he sales that share and he collects a $100.00, and then let’s say IBM reports, IBM reports on this day, so this is day zero, day zero. Now IBM reports and it’s actually great, they did way better than anyone could’ve expect it. So then the IBM shares skyrocket and they go to this level. And at this point—and I’ll talk more about short psychology and short squeezing and all that but maybe here he is like “oh, no” you know this is just a temporary bleep, let me keep holding my position, but then the stock keeps going up and up and he says “oh, this is just temporally it’s going to go back down” but at some point he’s tolerance for pain has been tap out and let’s say IBM gets to a $150.00—and since I can’t handle this anymore and I think you already noticing a very negative dynamic or a highly risky dynamic that occurs with shorts is that you can lost an arbitrary amount of money because what’s happening now—let’s say he wants top cove it right now, this is day ten and this alternate universe. So, now what is here is assets and liabilities. Going in to day ten his asset we said was a $160.00 because he had short sold, he had a $160.00 but he owns one share of IBM, one IBM. For him to unwind this, to pay back the share of IBM what he has to do. He has to go out into the market and buy a share of IBM at this higher price at a $150.00. So when he goes out he got instead of a $160.00 he have to use a—so he has $10 .00and then he use a $150.00 of that top go buy a $150.00 of the $160.00 to buy a share of IBM, so then he gets a share of IBM and then he can pay that share back to the broker and cancel out his position. And he’s left with just $10.00. So in this scenario when that stock price rows by $50.00 he lost $50.00 so he sold low and then he bought high. And the really risky thing that as a parent to you now about selling is that his lost could’ve been infinite. What if IBM instead going to $250.00 what if went to $200.00 then he would’ve lost $200.00 what if it went to $200.00 he would’ve a $100.00 if it went to $300 he would’ve lost $200.00, so his lost isn’t just the amount of your original short position it isn’t just the $100.00 or whatever the original price of IBM was. It can be an infinite amount, so it really can kill your balance sheet or really make you broke. While when you go in the long side of things, if I were to buy IBM here, let’s say I’m the guy that bought this share from the short seller what’s my worst case scenario. Well, the worst I can think is when the share of IBM goes to zero, so my lost is really, I can just go to zero, I won’t end up awing someone an infinite amount of money. So short selling inherently because of this infinite, you could say downside to the short seller, they can lost an infinite amount of money, they have to be really careful about how they make their position and how they protect themselves from this eventuality and we’ll talk a little bit about things like margin requirements and things like that in the future that essentially makes sure are t he brokers way of make suring oh not make suring of making sure that the short seller can actually is good to buy back the shares. Anyway see you in the next video.

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Learn about Shorting Stock 2

Let’s review what we went over in the last video and one of you are actually commented that it would be a good idea to draw a time line so I’ll draw a time line. Short, so we’re learning about short selling and in the last example let me do the time line where things work out well fro the sellers. So let me draw the stock price of IBM, let me make this it’s, let me draw up fairly.

Okay, here we go. So let’s say that this is -- oh, that could be our time line, that’s by day, let me draw the stock of IBM, it could look like something like -- let me discuss my Y axis -- let’s say the stock right is set a $100 straighten some place like that. And I -- and lets it does that later.

But we’re sitting at this point here, we’re sitting it -- let’s call this day zero, day zero, so, what does the short seller do. So let’s say the short seller right now, let me see if I can draw his balance sheet. So, right now the short seller he has assets and liabilities, so short seller, short seller, his assets -- I won’t worry about collateral o requirements and all of that right now but usually he had already has to have some assets ahead of time to be able to borrow shares but actually let me give him some collateral ahead of time.

So, let’s say that he already has $60.00 in his account. He has $60 of assets on day zero and then is the day that he says “you know what I’ve done my analysis and I think IBM” he hadn’t see this part of the stock price I mean it would be great if you did then you could short with conviction but all he sees is the past, if you did a stock track he would just see, let me do switch colors—he would just see this green part right here, he wouldn’t see all the stuff that ‘s in the future but he has a lot of conviction that IBM is going to go down.

So what he does is he barrows a share of IBM on that day. So here, so then on this day he barrows one share, so you has, they call that IBM, one IBM. And he also owns one IBM, he owns one IBM. Right after you barrow it before you do anything you do it, you have does an asset and you also own it back and if you wanted to unwind the borrowing of it, you could just give it back.

But what he does at this point is he sales this IBM. He sales that share and he gets a $100 for it because that was just the market price, that’s what people are willing to tread IBM shares for at that point in time. That’s day zero, and then let’s says IBM reports his earning and they are really bad, and that happen on probably happen on this day, IBM reports, IBM reports.

And the stocks turns to go down, down, down, people take a long time to realize how bad the report was and here at this day, once the stock had has reach $50, our short seller says ”okay that’s enough, I don’t think the stock is going to drop a lot more” so in day -- let’s call this day ten, ten days are gone by. Day ten he decides to cover, so going into day ten this is his balance sheet, let me redraw it—so going into day ten what does he have, he has a $160.00, the $60.00 he had before, just by actually working. And he owns, this is his assets and his liability is he owns one share of IBM to the broker and the broker really owns it to one of the share holders of IBM who happen to be keeping the share with the broker and he wants to cover.

So, what he does is he takes a $100.00, so he takes a $100.00 to, no, no, sorry he doesn’t take a $100.00, now the shares of IBM will only cost $50.00. So he takes $50.00 too buy a share, to buy one IBM, one IBM. So instead of a $160.00 he now a $110.00 and he ahs a share of IBM and then what he does is he takes the share of IBM and gives it to the brokerage to pay off his liability.

So the he’s done, he’s left with no liabilities and just a $110.00 of assets. So he made $50.00, so hopefully that clears up, clarify that’s up a little bit and that he sold here and bought here, just the reverse of, lot of stock, it’s almost like you’re acting reverse time. But this was a very good scenario for the short seller but he very easily could have made a blunder and let’s see what could have been a blunderous scenario.

So let me draw a different stock chart for IBM, so let me draw the stock up to the day in question and we said it was looking something like this where was trading right at around a $100.00 and this is the day that our sellers decides to shorten and this happens. He essentially barrow a share of IBM, so he has a one IBM share liability, he sales that share and he collects a $100.00, and then let’s say IBM reports, IBM reports on this day, so this is day zero, day zero. Now IBM reports and it’s actually great, they did way better than anyone could’ve expect it.

So then the IBM shares skyrocket and they go to this level. And at this point—and I’ll talk more about short psychology and short squeezing and all that but maybe here he is like “oh, no” you know this is just a temporary bleep, let me keep holding my position, but then the stock keeps going up and up and he says “oh, this is just temporally it’s going to go back down” but at some point he’s tolerance for pain has been tap out and let’s say IBM gets to a $150.00—and since I can’t handle this anymore and I think you already noticing a very negative dynamic or a highly risky dynamic that occurs with shorts is that you can lost an arbitrary amount of money because what’s happening now—let’s say he wants top cove it right now, this is day ten and this alternate universe.

So, now what is here is assets and liabilities. Going in to day ten his asset we said was a $160.00 because he had short sold, he had a $160.00 but he owns one share of IBM, one IBM. For him to unwind this, to pay back the share of IBM what he has to do. He has to go out into the market and buy a share of IBM at this higher price at a $150.00. So when he goes out he got instead of a $160.00 he have to use a—so he has $10 .00and then he use a $150.00 of that top go buy a $150.00 of the $160.00 to buy a share of IBM, so then he gets a share of IBM and then he can pay that share back to the broker and cancel out his position. And he’s left with just $10.00.

So in this scenario when that stock price rows by $50.00 he lost $50.00 so he sold low and then he bought high. And the really risky thing that as a parent to you now about selling is that his lost could’ve been infinite. What if IBM instead going to $250.00 what if went to $200.00 then he would’ve lost $200.00 what if it went to $200.00 he would’ve a $100.00 if it went to $300 he would’ve lost $200.00, so his lost isn’t just the amount of your original short position it isn’t just the $100.00 or whatever the original price of IBM was. It can be an infinite amount, so it really can kill your balance sheet or really make you broke.

While when you go in the long side of things, if I were to buy IBM here, let’s say I’m the guy that bought this share from the short seller what’s my worst case scenario. Well, the worst I can think is when the share of IBM goes to zero, so my lost is really, I can just go to zero, I won’t end up awing someone an infinite amount of money.

So short selling inherently because of this infinite, you could say downside to the short seller, they can lost an infinite amount of money, they have to be really careful about how they make their position and how they protect themselves from this eventuality and we’ll talk a little bit about things like margin requirements and things like that in the future that essentially makes sure are t he brokers way of make suring oh not make suring of making sure that the short seller can actually is good to buy back the shares. Anyway see you in the next video.

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