7

I'm just began playing in the stock market. I just executed a SELL, because I think the market is going down.

I don't actually have any of this stock. Apparently, it's quite common strategy. I would like to know, now that I have sold the stock, is there some sort of time limit before I'm required to buy the stock back?

What happens if I don't have the stock by the end of the time limit? Does the broker just automatically buy stock to give to the person who has bought my stock? Do I have to pay some sort of penalty fee?

|improve this question
  • 16
    Don't play in the stock market. It isn't a game. – George Marian Jun 21 '11 at 12:04
  • @George : hi, yes you are right. I only put in a tiny bit just to see what would happen, and put in stop limits in all of them to limit my losses. But yeah, probably best I should've just set up a paper account. – Joe.E Jun 22 '11 at 23:19
15

I'm just began playing in the stock market.

I assume you mean that you're not using real money, but rather you have an account with a stock simulator like the one Investopedia offers. I am hopeful that's the case due to the high level of risk involved in short selling like you're describing. Here is another post about short selling that expands a bit on that point.

To learn much more about the ins and outs of short selling I will point again to Investopedia. I swear I don't work for them, but they do have a great short selling tutorial.

When you short sell a stock you are borrowing the stock from your broker. (The broker typically uses stock held by one or more of his clients to cover the loan.) Since it's basically a loan you pay interest. Of course the longer you hold it the more interest you pay. Also, as Joe mentioned there are scenarios in which you may be forced to buy the stock (at a higher price than you sold it). This tends to happen when the stock price is going against the short sell (i.e. you lose money). Finally, did anyone mention that the potential losses in a short sell are infinite?

|improve this answer
6

If you sell a stock you don't own, it's called a short sale. You borrowed the shares from an owner of the stock and eventually would buy to close. On most normal shares, you can hold a short position indefinitely, but there are some shares that have a combination of either a small float or too high a short position that shares to short are not available. This can create a "short squeeze" where shorts are burned by being forced to buy the stock back. Last - when you did this, you should have instructed the broker that you were "selling to open" or "selling short." In the old days, when people held stock certificates, you were required to send the certificate in when you sold. Today, the broker should know that wasn't your intention.

|improve this answer
  • Now I have an image of burning shorts constantly replaying in my mind. Thanks for that. On a serious note, I suggest you explain the terminology and keep in mind that OP is a novice investor. – George Marian Jun 21 '11 at 12:17
  • So when you borrow from an Owner, how do you do that? Do you have to know the owner? What do you pay the owner for borrowing the stock for the said period? – Dheer Jun 21 '11 at 12:20
  • 2
    @dheer Its typically done through a broker. en.wikipedia.org/wiki/Short_%28finance%29#Mechanism – George Marian Jun 21 '11 at 12:31
  • 2
    @george - Understood, It's an odd position for me to explain a level a detail to someone who should know such things before "playing." If you point to what I should expand on, I'll happily edit. – JoeTaxpayer♦ Jun 21 '11 at 17:00
  • 1
    Agreed. I began writing a very stern response, but it didn't do much to answer the question actually asked. (So, I boiled it down to a comment.) As a general rule of thumb, anything that sounds like jargon, a technical term or -- sometimes -- a buzzword, should be explained. (Take this from someone that has taught IT classes and seen many glazed pairs of eyes.) Granted, that depends on the audience. The terms that stood out for me are buy to close and float. I would also consider explaining short position. Finally, selling to open == selling short? – George Marian Jun 21 '11 at 21:57
4

I don't actually have any of this stock. Apparently, it's quite common strategy

This is called naked short selling. It's not illegal per se, but there can be some major penalties so you should call your broker and ask them these questions. Intentionally naked short selling is not looked upon favorably. They'll probably try to recommend you a safer shorting system by which:

  1. You tell your broker you'd like to short X shares of ticker symbol ABC.
  2. They "locate" X shares to borrow from someone who holds long term (mutual funds, prop trading, etc.), in exchange for interest. Many investment banks with brokerages can do this all in house.
  3. You agree to pay the interest, receive X shares, and sell them.
  4. You invest the proceeds in something safe and reliable like treasuries to help cover the borrowing costs, while you wait for your market drop.
|improve this answer
1

Answers here are correct but I'll offer an extremely (overly) simple explanation that should help you in understanding the more detailed answers. When most people own stock they do so through a broker. Unless you jump through some hoops, the broker keeps the shares in the name of the brokerage. This is called holding the stock in street name.

When you sell short through a brokerage, the broker is letting you borrow a certain number of shares owned by someone else and sell them for cash now. At some point, you need to repay this loan with the same number of shares you borrowed. Ideally, you want the stock to drop to $0. The reason you might be forced to purchase the stock is that the actual owner(s) of the stock want to sell. If the broker has too many people wanting to sell, you will need to repay some of all of the loan (in shares) i.e. purchasing shares at the current market price.

|improve this answer

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.