What is the time frame for buying back stocks after short selling?
You are subject to a timeframe on the short sale but it's a financial one not a regulatory one. When you short a stock you borrow it from the broker and you have to pay margin interest on that borrowed amount.
Margin interest is not a good deal until you get into huge balances (but big balances are still a decent amount of money) for long term purchases. You could offset the short with long calls but that costs something also (commission+premium).
Eventually if you are short long enough the potential gain will be offset by the actual loss on margin interest or option comissions and premium. Depending on the amounts and term you'll have to do the math. The most you can gain on a short is the sale price all the way to zero but the upside risks are virtually unlimited so be careful with speculative issues.
The brokers want to do it because they charge margin interest on the margins so it's making money using their clients money to do so. The shares actually belong to other clients that have margin on their accounts, when you apply for margin, you give the broker the right to lend your shares out provided that they be available within a certain timeframe of being demanded by you. It's a convenience and a service to the investor, it's another revenue stream for the broker providing the service.
How is fractional reserve banking different from naked short selling?
Yes and no.
Its not the same as the day trader scenario because the day trader actually has assets (shares) behind his stock certificates!
'short selling' is actually the purpose of fractional reserve banking - to create more money.
When fractional reserve banking is used, a bank must have 10% of what they are actually lending out. This is recognized as standard banking practice in many countries. So if they have $100 in cash, they can issue $1000 in bank loans. But when this $1000 is paid back, they still only have $100 cash, they can then lend this out as $1000 again, not as 10,000.
But here is why fractional reserve banking does suck:
because you are paying interest on the full $1000 of that loan, the bank is raking in all the profit and only having to pay a small amount of that back to its depositors, who only actually deposited $100.
On an 8% interest loan, the banks return is not 8%, its 80%.
and here is why fractional reserve banking really sucks:
90% of money can be (and probably is) created through fractional reserve banking, with interest charged on all of that.
Put simply, for every dollar there is an attached amount of interest that must be paid back, in dollars.
But, how can you ever pay back interest in dollars, when the person you borrowed from creates all the dollars, and is not willing to give you interest free loans?
You can only pay the interest by borrowing more money, with more attached interest. Never ending debt.
bottom line: you can never get out of this cycle of debt without serious monetary reform, such as repealing the federal reserve act 1913 and having the government create its own, interest free money, as its given the right to in the constitution.
Hope this helps
How do you profit from short selling, and how does it work?
Short selling is basically the act of trying to make money on the price of a stock going down. If a stock in selling at $100/share, and you short sell, you are hoping that the price will go down and you will make the difference between the new price and the original price ($100).
In practice, you need to own shares before you can sell them, so in the case of short selling you borrow the shares from someone and then sell them. Once you have gained/lost sufficient money, you give back the borrowed shares by "covering" your investment.
One note on short selling: In the case of buying a stock you have an unlimited upside and a limited downside. This means that, if a stock is selling at $100/share, your investment can go up to infinity or down to 0. The reverse of this is true for short selling, as the best you can do in a short position is to make only as much money as the stock is trading for, and the worst you can do is owe an infinite amount of money to the person you borrowed from.
In short selling, the seller does NOT own the stock he is selling. That's why he borrows it. For example, Microsoft (MSFT) is currently selling at $28.50 per share and I don't own it. But I think it's going to go down in price so I decide to short sell it. On my trading platform I just choose 'sell short' rather than 'buy,' specify the number of shares I want to sell and hit the execute button. Behind the scenes, my brokerage allocates the shares for my short sale from their own holdings, or from the account of one of their customers (they don't know about it, and they are at no risk because of the short sale). Those shares are sold on the open market to someone who was looking to buy MSFT.
Let's say the stock does drop over the next few weeks to a price of $26. I decide to 'cover' my short position (which just means buying stock on the open market and returning it to whomever it was borrowed from. Again, my firm does this for me and it all happens nearly instantaneously). The stock price declined by 10%, so I made a 10% profit.
That's it in a nutshell.
I think the deadline is arranged between you and the broker, whom you're buying the shares from for which in the future you hope to purchase them back for a lower price. It's really for the pros if you ask me.
Stocks of other clients are "held in street name" so they can be used for this purpose.
Therefore you are able borrow them(the owner will never know) for the transaction that you are betting the stock will lower price.
It is then at that lower price that you will gain profit because you can sell YOUR newly begotten shares at the original price, only you now have them at a better price than the ones you borrowed.
Easy way to think of it is you borrow stock because you can't sell naked(without the stock) while you wait for your shares of that same stock which will be in your possession after it has fallen in price(here you cover with your own cheaper shares); so you can sell them at your anticipated lower cost, but for the original price as the borrowed shares.
Great I've made my profit - time to give back the shares I borrowed to make this all happen.
No shares then you can't play unless you borrow some.
Short selling is betting that a stock price will decline. Essentially, you borrow shares from a broker and sell them now, with a promise to replace them within a certain time frame. If the price declines, you can buy them back cheaper and pocket the difference. However, if the price increases, you will lose money.
Well no, the above poster is right you are shorting at the ask, and buying back at the bid, you lose. Usually short selling is done in margin accounts, which is essentially a loan. Second in your scenario you explained the bid and the ask don't necessarily reflect the price you will actually pay and you could very likely lose money. Second the transaction fee associated on that transaction would likely result in a net loss, let's say the bid ask spread is a $1.50, if you complete the transaction as stated above you will pay at minimum (if you use a site like e-trade) $8 to short it and $8 to buy it back so it cost you $16 to make $1.50 profit, you've lost $14.50. Lastly NASD day trading regulations make these types of transactions pretty much impossible.