In a short sale you sell something, wait a bit, and then buy it back. Thus, you have made a bet that the thing will decrease in value between when you sell and when you buy again. For instance: you sell Lehman for $10, wait a couple of hours and buy it back for $5 and you have twice as much Lehman for the same money. Notice that you bought it back. What you're betting is that Lehman is going down, not bust.
Short sales can be simple like that, or they can involve borrowing the stock or negotiating an option to buy it in the future.
Naked shorting is when you sell "borrowed" stock without bothering to check if anyone will loan it to you (what do you mean you don't want to sell your car!)
Back in July, the SEC banned most naked shorting. Yesterday it banned any short selling of financial institutions. You are now only allowed to bet that these stocks will go up. Anyone care to take that bet?
Friday, September 19, 2008
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