Our financial system is crumbling this week.

[G. Keenan]

But, what are the technicalities. Obviously, you can't buy a stock and hope it goes down. So, if you knew that Microsoft was going to go down tomorrow and you wanted to make money, what actions would you take?

You pay a fee to borrow the stock from a broker and immediately sell it, then you wait till the price drops, buy it back and return it to the broker.

God bless America.

Are only "sophisticated" investors allowed to short stocks? My little brother likes to play around with a bit of expendable money on the stock market and he just sort of stumbled into doing this. Then he got a notice from Bank of America telling him he wasn't allowed to do it.

[jim]

.... it's really pretty complicated but essentially if you short something you make money if it goes down, and lose money if it goes up.

Thanks, smart ass

But, what are the technicalities. Obviously, you can't buy a stock and hope it goes down. So, if you knew that Microsoft was going to go down tomorrow and you wanted to make money, what actions would you take?

I shouldn't answer this because I really don't know, and I think there are others on here that probably do. But I'll try...

You basically are "borrowing" stock today at the current price. You sell it, but must repay it at a future point in time. If the price has gone down, you buy it at that price and repay your stock pocketing the difference. If it goes up, well you have to buy it at that new price but you already sold it for a lower price previously.

So say on day 1 you sell 10 shares at $10 per share = $100. Day 30 comes around and the stock has gone down to $9, you buy 100 shares at $9 = $90 and give back the shares you borrowed. You are up $10.

I think that's basically how it works in a nutshell.

[cpebbles]

Are only "sophisticated" investors allowed to short stocks? My little brother likes to play around with a bit of expendable money on the stock market and he just sort of stumbled into doing this. Then he got a notice from Bank of America telling him he wasn't allowed to do it.

Was that when they stopped short selling a few weeks back when this whole mess finally exploded?

[Michael]

so, how exactly do you short a stock and how do you make money/lose money?

If we are referring to options traded on an exchange, typically they aren't used for stocks, however they do exist (for instance CBOE has 'em). Most are used to protect against things like the price of oil or interest rate movement.

If you buy a short on a future for 1 dollar, like oil, you make money if the future price goes below the strike price. If the strike price is 100 and the future is trading at 95 you can make 4 dollars* (5-1=4) when you exercise the option**. If the price is above 100, you don't excise the option and you lose your dollar. On the other hand the seller of the option, makes money on that initial dollar fee assuming the price doesn't fall below 100.

Call options are the opposite. The buyer makes money when the price goes above the strike price, and the seller makes money on the option selling price if it doesn't.

I hope that makes sense. Let me know if it doesn't, and I'll try to clarify.

*I'm excluding TVM, fees and taxes for simplicity.
**European style options have a specific exercise date, while American can be anytime before the expiration date.

[AWvsCBsteeeerike3]

Thank you guys. That really was veryhelpful. I appreciate it.

Here's another question? How is oil down ~50% from it's high a year ago?

[greenback44]

But, what are the technicalities. Obviously, you can't buy a stock and hope it goes down. So, if you knew that Microsoft was going to go down tomorrow and you wanted to make money, what actions would you take?

You pay a fee to borrow the stock from a broker and immediately sell it, then you wait till the price drops, buy it back and return it to the broker.

God bless America.

Are only "sophisticated" investors allowed to short stocks? My little brother likes to play around with a bit of expendable money on the stock market and he just sort of stumbled into doing this. Then he got a notice from Bank of America telling him he wasn't allowed to do it.

The broker will have certain restrictions. One example, if memory serves, is that brokers won't allow a short sale on a stock with a price below $5. Another restriction in the news recently is that "naked shorts" -- short-selling where the broker doesn't actually lend you the stock -- are not permitted by the SEC. So if the broker won't lend you the stock, then you're out of luck.

[Arthur Dent]

Are only "sophisticated" investors allowed to short stocks? My little brother likes to play around with a bit of expendable money on the stock market and he just sort of stumbled into doing this. Then he got a notice from Bank of America telling him he wasn't allowed to do it.

I think anyone is allowed to do it, although you may need to sign some additional agreement with your broker. Short selling of certain financial stocks was temporarily banned recently to try and keep prices from falling too far. I didn't understand the reasoning for this ban. Financial stocks probably should be getting hammered.

[G. Keenan]

Are only "sophisticated" investors allowed to short stocks? My little brother likes to play around with a bit of expendable money on the stock market and he just sort of stumbled into doing this. Then he got a notice from Bank of America telling him he wasn't allowed to do it.

Was that when they stopped short selling a few weeks back when this whole mess finally exploded?

No, this was last spring.

[Michael]

My guess is he was selling calls and/or puts, which can get ugly is the market moves heavily against you. It sounds like BOA has a serious flaw in their trading system if they were allowing this.

But that's only guess.

[dangerous]

I think you have to fill out a form if you want permission to short stocks. Also there are certain stocks that an individual cannot short via a traditional broker, eg under $5, etc.

I have not read the thread but does anyone know why the price of gold has been holding up but gold mining stocks are in the toilet? I bought $425 worth of a gold mine stock today as a gamble.