Insiders who have locked up stocks but still want to sell could presumably just short the stock and take out a loan secured on the stock to get the financial effects of selling, without actually selling...
I wonder if that's what's happening with ~$1T of stocks currently locked up...
laluser 12 minutes ago [-]
That’s almost always prohibited.
meowkit 7 minutes ago [-]
Given the current administration’s recent market behavior I would not be shocked if people got away with exactly what OP described.
compiler-guy 1 minutes ago [-]
It's often prohibited by contract, not just law, so what the administration thinks is only part of the story.
W-Stool 1 hours ago [-]
If you make money shorting a stock, who do you make money from?
bwfan123 56 minutes ago [-]
> who do you make money from?
When you own stock at a broker in a margin account, you may sign an agreement to allow the broker to lend out your stock to someone else. For lending your stock, you are entitled to a stock-borrow fee which usually is quite small say 0.25%, and paid by the borrower (short-seller). The borrower then sells the stock to someone else. At a later point, the short seller closes their position by buying it back, and returning it to you. This is roughly the mechanics of it. So, to answer your question, the short seller makes money from folks who buy high and sell low. In this specific example, the stock-borrow fee say was 5% because, the float is still low, and if the short seller borrowed at $165 after the IPO and sold it, and then bought it back at $135 and closed their position, they made money from folks who bought at $165 and sold at $135.
t1234s 50 minutes ago [-]
You can also sell in the money call options in anticipation the stock will go down. You keep the premium the call buyer pays.
mikestew 3 minutes ago [-]
But to sell the calls, you should own the stock first. Puts can be bought w/o owning the stock. Granted, the put buyer pays the premium, so money you don’t get guaranteed money in your pocket.
inigyou 1 minutes ago [-]
Exactly the same people you'd make money from if you sold the stock high and bought it low (ending up with the same amount of the stock)
rtkwe 7 minutes ago [-]
They're selling a borrowed stock, so any buyer on the market when you open the short position is where the money comes from. Short sellers get the money immediately and then pay fees to the people they borrowed from until they close the short position.
Bitcario 52 minutes ago [-]
Alice holds SpaceX stock and believes it will rise. Bob believes the stock will fall. Alice and Bob reach an agreement for Alice to "lend" their SpaceX stock to Bob for a small "fee". Bob immediately sells the SpaceX stock at the current market value. After some time Bob will buy back the sold SpaceX stock at the current market value (hopefully less than Bob sold it for) and return the "borrowed" SpaceX stock to Alice thereby fulfilling the original contract.
It's also possible Bob's thesis on SpaceX could have been wrong and the shares could skyrocket. There's usually a provision in the contract for Alice to recall the shares she lent to Bob. In this case, Bob would be forced to buy SpaceX stock at the current market value and likely lose money on the overall trade.
To answer your specific question, "Who do you make money from?" It's actually not clear. Bob selling-high and buying-low doesn't necessarily mean whom Bob sells-to and whom he buys-from are on losing sides of the trade despite Bob making a profit. E.g. the buyer of Bob's short-sell could write calls and the stock could close pass the strike on expiration and turn a small profit as well.
jakequist 26 minutes ago [-]
It’s also not always the case that Alice is the loser. If SpaceX stock jumps up again after the position closes, then Alice is making money and both parties are winners.
Windchaser 1 hours ago [-]
It's still just "buy low, sell high". You make the money from the same folks you normally would, only the order of when you buy and sell is swapped.
vibcdingenjoyer 1 hours ago [-]
Someone who bought and expected to make a profit, but reached a point where they hit their stop loss or just wanted to get out the trade at any cost and couldn’t bear to wait longer. Quite possible a redditor who frequents r/wallstreetbets and YOLOed in.
rtkwe 4 minutes ago [-]
They're not really making any money when they close out their short position. The money came when they first opened the short position and sold the shares. When they close they just lock in how much they're going to net off the position.
Metricon 27 minutes ago [-]
Keep in mind that unlike purchasing a stock where the most amount of money you can lose is the amount of money you spend buying the stock (assuming you didn't buy it on margin), if you directly short a stock, there's technically no limit to the amount of money you could lose. If a stock goes up 1000% after you short it, then you could lose far more money than you put into it.
dyauspitr 23 minutes ago [-]
You can always hedge your shorts and limit your downside. It’s not a huge issue unless you have absolutely no idea what you are doing.
inigyou 25 seconds ago [-]
Spoken like someone who's never actually done it. Hedging to limit max loss is extremely expensive.
vl 2 minutes ago [-]
Does market closing and not trading continuously affects this?
If market opens at significantly different price, you may be forced to liquidate and loose more than expected.
anonymars 14 minutes ago [-]
It seems like a prudent warning in a thread explaining the very basics of short selling
Also worth mentioning you might be on the hook to buy it back at any time; after all the person you borrowed it from may themselves wish to sell it. If widespread, this is the basis of "short squeezes" (e.g. of GameStop fame/infamy), if a lot of people are trying to buy it at the same time
paxys 7 minutes ago [-]
Normal sale - buy low, sell high, pocket the difference
Short selling - sell high, buy low, pocket the difference.
The money is coming from the same place in both cases - other people in the market.
rtkwe 6 minutes ago [-]
You're missing the cost to borrow on the stock which is a daily fee to continue borrowing the stock.
mahkeiro 25 minutes ago [-]
From people who bought the stock when you started to short.
ratelimitsteve 31 minutes ago [-]
1) borrow the stock
2) sell it
3) rebuy it at the lower price (assuming you're right)
4) give it back to whomever you borrowed it from plus a consideration for letting you hold what's theirs for a bit
Whatever's left after you return the stock and pay the interest is your profit, which comes from the people who bought it from you in step 2. If you're wrong, and the price goes up, you have to replace the stock you borrowed at a higher price than you got for it and that's your loss (which could potentially be infinite, as opposed to long positions where you can only lose what you initially invested)
tomasphan 1 hours ago [-]
The buyer of your short sale would lose money to you. Remember options are contracts between two parties.
Shorters are selling to willing buyers at the current fair market price. So that they may survive.
binyu 55 minutes ago [-]
The market just redistributes wealth from less informed players to more sophisticated/informed ones.
kibwen 31 minutes ago [-]
I wouldn't quite go that far. The fact that markets can remain irrational longer than participants can remain solvent means that participants with deeper pockets have an inherent advantage, even if they have less information. How quickly a random walk will take you to zero depends on how far above the baseline you start.
Analemma_ 1 hours ago [-]
The person you sold it to after borrowing it, who paid for it at the elevated price.
quickthrowman 53 minutes ago [-]
When you short a stock, you borrow shares from someone who is holding that stock and their broker gets money for lending the shares and sometimes the holder of the shares lent out gets money. You sell the shares, probably to a market maker. The cash is credited to your account and held as collateral.
Sometime later, the stock has fallen and you decide to close the position. You buy back the shares with the borrowed money probably from a market maker and close your position. You give the shares you borrowed back to the lender. Your net profit is sell_price - buy_price - borrow_fees, anything left is your profit.
Stocks are not zero sum like options or futures, they also have no expiration date (unlike derivatives), it’s possible a short seller sold shares to someone who later profited, and then it’s also possible to buy the shares from someone who profited, even if you made a profit on shorting the stock.
So the answer is “other market participants” who also may have profited on their buy or sell.
yieldcrv 34 minutes ago [-]
you borrow shares from a permabull and immediately sell them to whatever is buying
all you owe is the number of shares you sold, the original owner doesnt care what happened as long as they get identical ones back eventually. In the meantime, you pay interest on the initial value of what you borrowed and sold
You just sit on the cash
later when the shares are cheaper, you buy shares on the open market and give them back to the person you borrowed from
whatever cash is leftover from rebuying is your profit
Also, highly related with significant discussion in the past 2 days:
https://news.ycombinator.com/item?id=48933344 - "SpaceX stock erases all its gains and slides below IPO price in intraday trading" - latimes.com | 306 points | 1 day ago | 281 comments
I wonder if that's what's happening with ~$1T of stocks currently locked up...
When you own stock at a broker in a margin account, you may sign an agreement to allow the broker to lend out your stock to someone else. For lending your stock, you are entitled to a stock-borrow fee which usually is quite small say 0.25%, and paid by the borrower (short-seller). The borrower then sells the stock to someone else. At a later point, the short seller closes their position by buying it back, and returning it to you. This is roughly the mechanics of it. So, to answer your question, the short seller makes money from folks who buy high and sell low. In this specific example, the stock-borrow fee say was 5% because, the float is still low, and if the short seller borrowed at $165 after the IPO and sold it, and then bought it back at $135 and closed their position, they made money from folks who bought at $165 and sold at $135.
It's also possible Bob's thesis on SpaceX could have been wrong and the shares could skyrocket. There's usually a provision in the contract for Alice to recall the shares she lent to Bob. In this case, Bob would be forced to buy SpaceX stock at the current market value and likely lose money on the overall trade.
To answer your specific question, "Who do you make money from?" It's actually not clear. Bob selling-high and buying-low doesn't necessarily mean whom Bob sells-to and whom he buys-from are on losing sides of the trade despite Bob making a profit. E.g. the buyer of Bob's short-sell could write calls and the stock could close pass the strike on expiration and turn a small profit as well.
If market opens at significantly different price, you may be forced to liquidate and loose more than expected.
Also worth mentioning you might be on the hook to buy it back at any time; after all the person you borrowed it from may themselves wish to sell it. If widespread, this is the basis of "short squeezes" (e.g. of GameStop fame/infamy), if a lot of people are trying to buy it at the same time
Short selling - sell high, buy low, pocket the difference.
The money is coming from the same place in both cases - other people in the market.
2) sell it
3) rebuy it at the lower price (assuming you're right)
4) give it back to whomever you borrowed it from plus a consideration for letting you hold what's theirs for a bit
Whatever's left after you return the stock and pay the interest is your profit, which comes from the people who bought it from you in step 2. If you're wrong, and the price goes up, you have to replace the stock you borrowed at a higher price than you got for it and that's your loss (which could potentially be infinite, as opposed to long positions where you can only lose what you initially invested)
Shorters are selling to willing buyers at the current fair market price. So that they may survive.
Sometime later, the stock has fallen and you decide to close the position. You buy back the shares with the borrowed money probably from a market maker and close your position. You give the shares you borrowed back to the lender. Your net profit is sell_price - buy_price - borrow_fees, anything left is your profit.
Stocks are not zero sum like options or futures, they also have no expiration date (unlike derivatives), it’s possible a short seller sold shares to someone who later profited, and then it’s also possible to buy the shares from someone who profited, even if you made a profit on shorting the stock.
So the answer is “other market participants” who also may have profited on their buy or sell.
all you owe is the number of shares you sold, the original owner doesnt care what happened as long as they get identical ones back eventually. In the meantime, you pay interest on the initial value of what you borrowed and sold
You just sit on the cash
later when the shares are cheaper, you buy shares on the open market and give them back to the person you borrowed from
whatever cash is leftover from rebuying is your profit
https://news.ycombinator.com/item?id=48933344 - "SpaceX stock erases all its gains and slides below IPO price in intraday trading" - latimes.com | 306 points | 1 day ago | 281 comments
https://news.ycombinator.com/item?id=48920181 - "SpaceX bond worth 10% less than issue price – heading for junk bond status" - ft.com | 561 points | 2 days ago | 603 comments