By Merrie Spaeth, KERA 90.1 commentator
Dallas, TX – This month short selling had the highest volume in market history. What's a short seller? Are we talking the Mini Me of the trading floor? What are people saying all those nasty things about them? And does it matter to you? Yes, it does. I'm Merrie Spaeth for Marketplace Middays.
Most of us buy a stock, hoping the price rises, so when we sell it, the difference between what we paid and what we get is our profit. Buy at $50, sell at $100, you make $50 (simplified, of course). Short sellers work like this. They 'borrow' the stock from a broker, and of course, they agree to return it. They sell it at that price, hoping the price will fall. They buy it back at the lower price and return it to the broker. Borrow and sell at $100. You now have $100 cash. Stock falls to $50. Buy back stock at $50. Return to broker. Keep $50.
As the stock market has declined ... and declined ... and declined ... shorting has become part of normal investing, for the very sophisticated and well-heeled. The portfolio manager for the Grizzly Short Fund reminds us normal people that "You have limited gains and unlimited liability." Here's why: you borrow that same stock and sell it at $100. You have the same $100 cash, but the stock goes up to $200! You owe the broker his stock back, but you have to spend the $100 plus another $100 to get it. You lost $100.
Some short sellers, like James Chanos, are keen analysts. He's one of those who blew the whistle on Enron. Some short sellers, like Tony Eglindy, who has a popular web site, work by circulating rumors about a company, thus depressing the price. He's now under indictment for illegally getting confidential data from law enforcement agencies. He spread that information all around, sometimes it was true, other times not, but the prices of all those stocks dropped precipitously, too. Eglindy made out like a bandit ... appropriate since he was one.
Some of us may be able to function in the shorts world, but most of us have enough difficulty focusing on more traditional investing. For KERA Marketplace Middays, I'm Merrie Spaeth.
Merrie Spaeth is a communications consultant in Dallas.