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Hi Allan,
Your explanation (presented very clearly and
concisely) took time to pen and is very, very much
appreciated.
Thank you so much,
Cris
----- Original Message -----
Sent: Thursday, March 25, 2004 3:37
PM
Subject: [sharechat] Short selling answer
to Cris.
Hi Cris,
In the US regular stocks can only be sold
short on an uptick in price. This is an attempt to slow the downward
spiral you allude to. This however, does not stop people from shorting
and shorting and shorting and driving the stock down as there will be many
downticks in between their shorts.
The first step to defeating shorts
that are driving down a fundamentally good stock is to keep track of the total
volume of shares sold short. As an example, (numbers made up for
simplicity) let's say there is a float of 15,000,000 shares with another
5,000,000 closely held by people who are just not going to sell. (Family,
trust funds etc.) Some guys decide to short the stock at say $100.00 per
share, drive down the price to $50.00 and buy back at that price.
(covering their shorts) As the short position builds, you realize what's
going on and keep track of the number of shares sold short. Over here
they are published regularly, so it's relatively easy to keep tally on them.
You learn that they have sold 10,000,000 shares short. This represents
2/3 of the float and 50% of the totality of shares issued. The price of
your fundamentally solid stock is now say $60.00, but they're still trying to
drive it to $50.00 and you know it's worth $100.00.
Buy as much as you,
your family and friends can possibly afford and go to chat sites letting
everyone one who will listen know that the shorts appear to be beating the
price of shares down in order to profit from their short
sales. Result "A SHORT SQUEEZE". Since your purchases will be
driving the price of the stock up and the shorts are committed to cover their
shorts at some point the rise in value will be tolerated at first, but as it
nears say $80.00 and they see their profits evaporating, they will panic and
try to get out. To get out, they have to buy, which further drives the
price up and adds to their losses.
Now this is a simple example to
illustrate the basic principal. It also explains why bear market rallies
are so quick and violent. It's the shorts attempting to exit their
positions. Actually the reverse of a panic selling crash. Over here
there are services that continually watch for large short positions building
in stocks that are sound and increasing in price. The higher the short
position the better, because it guarantees a Hugh reservoir of buyers to
further push prices up when the squeeze starts. Actually it's fun to
watch when you've taken the long position and watch the stock jump 10 to 40%
in one day.
On the other hand when you've shorted a stock because you
think it's a dog and along comes a buyout offer 25% higher than the
market price -- you get killed!!!! I've been through both
situations. Hope the illustration of the general principal helps -- on
the other hand you may already know all this. I pass it along
because I know that short selling is not as widespread in the NZ and Aussie
markets as it is here, where just about anyone with a margin account can short
a stock that is available to be shorted.
Cheers, GO NAIL THOSE
SHORTS!!!!
Allan
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