Short Selling
InvestorEducation / Learning to Invest Jul 31, 2014 - 07:26 PM GMTWhen you buy your shares of apple at $ 100 i sell short to you.
You wanted the stock and bought at $ 100. My short acts to support that judgment.
I am providing true liquidity to the market, because once i short/sell those shares to you, i must be able to buy them back from you at all times, whatever the price.
Unlike most participants, short sellers are fully marked to market at all times.
My capital will be so encumbered for the duration of my short.
I , not apple, must likewise pay the dividend of the stock as a charge to my capital for the duration of the short.
My capital pays you rent.
Leverage is your ally and my mortal enemy.
By providing that liquidity to you, my capital assumes unlimted risk:
You only assume risk to 100 % of the $ 100 price you paid.
When apple falls my capital serves you yet again:
Because when apple hits $ 80. I buyback the shares, providing liquidity, volume and a floor at $ 80. From there the stock has a chance to recover.
This operates to minimize your losses, and give you the opportunity to exit the position.
Without my capital, the stock doesn’t hold at $ 80, but insteads falls to $ 50. Your losses are greater: sheer fall encourages selling, thereby amplfying your losses.
Short sellers are the only guaranteed capital to support the price of an instrument; thus serving you, the owner.
The absence of short sellers is a building missing many floors.
Those who decree short selling, those who deplore it,
And all longs in general will come to rue the
Driving of short sellers from markets.
Ignorance, arrogance or extraordinary popular delusion ?
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