Have you ever seen a great piece of news on a stock, anticipated gains, and for some reason, that stock fell into the red? Have you followed a company that you know is doing amazing things in their industry, but for some reason, can’t seem to get ahead in the market? While there could be various reasons for this type of phenomenon, more often or not, the reason is that sell-side traders are attacking the stock by shorting it. Today, we’ll talk about what shorting a stock means, what needs to happen in order for a stock to be shorted, and what you can do about it if the shorts are attacking a stock that you care about!
What Does It Mean To Short A Stock?
Shorting a stock may seem like an overwhelmingly complex process. However, it’s actually a very simple one, once you know the inner workings of the process. You see, when a trader shorts a stock, he’s not necessarily buying it. In a way, that trader is selling the stock, but it goes a bit further than that.
You see, those who short stocks are essentially borrowing shares. These shares come from active accounts of those who are long on the stock. So, if you’re long, they are essentially borrowing your shares. From there, they sell the share in the market at the current price. Of course, if too many shares are sold, it leads to declines in the value of the stock.
Those who take part in this practice are looking for those declines. Remember, they have borrowed shares and sold them in the market at the price at which they borrowed them. The idea is that they will repurchase the shares later on at a lower price and give them back to those they borrowed them from. Of course, if all goes well for the short-side trader, he will make a profit because he was able to buy the stock for less money than he sold it for in the beginning. At the end, the short makes money, the long loses money, and in many cases, the long is none the wiser, wondering why the stock he has invested in is falling.
What Needs To Happen For Shorts To Make Money In This Process?
In order for those shorting a stock to make money in the process, only two things need to happen. First and foremost, they need to find shares to borrow. While they may not ask the longs, “Hey, can I borrow your shares so I can push their value down?”, they will go to brokers who lend shares under the noes of the longs, who have no idea it’s happening.
From there, the second thing that needs to happen is the price of the stock needs to fall. After all, the short seller is selling at the current price with a promise to return shares. If the price of the stock falls, there’s a spread where profit is created. However, if the price of the stock increases, those who are short on the stock will lose money when they have to repurchase the shares they borrowed at the higher cost.
What Longs Can Do To Stop The Manipulation
At the end of the day, without the longs, the shorts have absolutely nothing. While most longs have no idea that they can put a band aid on the bleeding wound, the truth of the matter is that they have all the power in the world since the shorts can’t complete the task without them.
If short selling is happening surrounding a stock that you care about it, there are two things that you can do to work to stop the bleeding. First and foremost, you’ll need to get on the phone with your broker. When you buy shares from a broker, it is automatically assumed in many cases that you are OK with your shares being borrowed. Call your broker and tell them that you are not. Lock those shares down so that the shorts can’t get hold of them.
The next thing that you can do is spread the word about how good of a company the company you’re invested in is. In doing so, the goal is to get more people buying shares, sending the value of the stock upward. This way, even the shorts that were able to buy shares take on a loss.
Never Miss The News Again
Do you want real-time, actionable news delivered to your inbox? Join the CNA Finance mailing list below!