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Is there an ELI5 version of this somewhere ? I understand some part of it but as a non-native english reader and not-so-financial guy it makes it hard to grasp

by IMTDb 11y ago

Is there an ELI5 version of this somewhere ? I understand some part of it but as a non-native english reader and not-so-financial guy it makes it hard to grasp it all.

aerovistae 11y ago
ELI5: Musk borrows money from banks for his companies. He uses his own stock in these companies as a collateral, which means that they bank can claim the stock from him if he fails to repay them in the long run. It also means that if the stock starts dropping in value, the banks can take it from him and sell it as a precautionary move, since if it dropped too much they would have nothing. If the banks were to do this, in theory this would hurt the companies. Right there is where my understanding drops off. Can someone else finish the narrative? Why would the banks selling off the stock collateral hurt Tesla ? How is it any different from me selling my stocks and someone else buying them? How does Tesla lose anything there?
- icefo 11y ago
  Just speculating from what you said because I don't have a WSJ subscibtion but it could be that if the banks sell Musk's stock he can't call the shots anymore and bad decisions happen. That and if people hear that the banks are selling stock they could think: omg must sell now before loosing everything because they must have reasons to sell it That's my 2 cents not an economist in any way
- ksdale 11y ago
  It hurts the other shareholders a lot more than it hurts the companies. The stock price would drop precipitously if a huge block of shares was sold like that. The main way I see it hurting the companies is that stock price is a proxy for the value of the companies that can affect their ability to borrow or raise more capital through selling stock.
- dxbydt 11y ago
  Sigh! tbh the wsj comments on this particular issue are mostly accurate, though the other issues are debatable. 1. Tsla is quite volatile. 2. If it drops significantly by some Y%, Musk's shares which are used as collateral would be called. 3. When that margin call gets triggered he'd be forced to sell X shares to meet it. 4. X is very large. 5. Since X is large, you have a ton of tsla on the market with no demand. Price will drop like a rock, by some Z%. 6. Say I and you hold Tsla shares. Obviously we are OK with a price drop of Y%, because we know the damn thing us volatile, yet we chose to buy into it because we believe in its upside. 7. But just because we are OK with Y% drop due to some macro event doesn't mean we are OK with this Z% additional drop due to the way Musk structured his personal investments. In other words, ordinary investors could end up losing a ton of money (y + z) for no fault of their own, than if they had just lost y% which they had signed up for. Depending on what numbers you attach to y and z, you can make the case this is unfair or very unfair. For his part, Musk claims the probability of the above is low, though definitely nonzero in today's uncertain market conditions.
  - aerovistae 11y ago
    I understand and at the same time there's one little thing I'm missing which has always mystified me about stocks: Who sets "the price"? I understand that if a large amount of shares appear on the market with no demand, the entity selling them will lower the price in an effort to sell them. But how does that factor into "the price" that the stock is worth across the market from any/all sellers? How is that calculated? Is it just whatever the stock last sold for?
    - brwnll 11y ago
      Yes, the stock price represents the last transaction. If you are looking at a stock trading platform, you will usually also see "Current Ask" and "Current Bid" representing standing sell and buy prices (respectfully) for the stock.
      - aerovistae 11y ago
        Re: the last transaction, what if I sell someone a couple shares of Microsoft stock for $1? That obviously wouldn't affect the stock. Is there some mathematical expression of amount of stock that has to be sold to impact the price? Or is it a question of the sale being done by certain authorized entities? BTW, if you don't see "reply" under this comment like I don't for yours, you can go to my profile page and "comments" and then you will see the "reply" link.
- drumdance 11y ago
  A mass selloff would depress the stock price, which in turn could lead to more people dumping the stock, creating a downward spiral. Not only would this hurt the company's investors, it would seriously impact their ability to raise capital in the future. (Though that's probably true anyway if the banks decide to call the loan. By doing so they're basically saying they don't believe the company can repay its debts, and other potential lenders would either stay away or demand more onerous terms.) Note I said "could" -- the actual effects depend on how much stock is being pledged and how quickly banks would try to dump it. Regardless, it would be huge negative news and affect the stock price negatively. Look at how Apple's stock got punished because iPhone sales have stopped growing.

by IMTDb 11y ago

Is there an ELI5 version of this somewhere ? I understand some part of it but as a non-native english reader and not-so-financial guy it makes it hard to grasp it all.

aerovistae 11y ago

ELI5: Musk borrows money from banks for his companies. He uses his own stock in these companies as a collateral, which means that they bank can claim the stock from him if he fails to repay them in the long run. It also means that if the stock starts dropping in value, the banks can take it from him and sell it as a precautionary move, since if it dropped too much they would have nothing. If the banks were to do this, in theory this would hurt the companies. Right there is where my understanding drops off. Can someone else finish the narrative? Why would the banks selling off the stock collateral hurt Tesla ? How is it any different from me selling my stocks and someone else buying them? How does Tesla lose anything there?

icefo 11y ago
Just speculating from what you said because I don't have a WSJ subscibtion but it could be that if the banks sell Musk's stock he can't call the shots anymore and bad decisions happen. That and if people hear that the banks are selling stock they could think: omg must sell now before loosing everything because they must have reasons to sell it That's my 2 cents not an economist in any way
ksdale 11y ago
It hurts the other shareholders a lot more than it hurts the companies. The stock price would drop precipitously if a huge block of shares was sold like that. The main way I see it hurting the companies is that stock price is a proxy for the value of the companies that can affect their ability to borrow or raise more capital through selling stock.
dxbydt 11y ago
Sigh! tbh the wsj comments on this particular issue are mostly accurate, though the other issues are debatable. 1. Tsla is quite volatile. 2. If it drops significantly by some Y%, Musk's shares which are used as collateral would be called. 3. When that margin call gets triggered he'd be forced to sell X shares to meet it. 4. X is very large. 5. Since X is large, you have a ton of tsla on the market with no demand. Price will drop like a rock, by some Z%. 6. Say I and you hold Tsla shares. Obviously we are OK with a price drop of Y%, because we know the damn thing us volatile, yet we chose to buy into it because we believe in its upside. 7. But just because we are OK with Y% drop due to some macro event doesn't mean we are OK with this Z% additional drop due to the way Musk structured his personal investments. In other words, ordinary investors could end up losing a ton of money (y + z) for no fault of their own, than if they had just lost y% which they had signed up for. Depending on what numbers you attach to y and z, you can make the case this is unfair or very unfair. For his part, Musk claims the probability of the above is low, though definitely nonzero in today's uncertain market conditions.
- aerovistae 11y ago
  I understand and at the same time there's one little thing I'm missing which has always mystified me about stocks: Who sets "the price"? I understand that if a large amount of shares appear on the market with no demand, the entity selling them will lower the price in an effort to sell them. But how does that factor into "the price" that the stock is worth across the market from any/all sellers? How is that calculated? Is it just whatever the stock last sold for?
  - brwnll 11y ago
    Yes, the stock price represents the last transaction. If you are looking at a stock trading platform, you will usually also see "Current Ask" and "Current Bid" representing standing sell and buy prices (respectfully) for the stock.
    - aerovistae 11y ago
      Re: the last transaction, what if I sell someone a couple shares of Microsoft stock for $1? That obviously wouldn't affect the stock. Is there some mathematical expression of amount of stock that has to be sold to impact the price? Or is it a question of the sale being done by certain authorized entities? BTW, if you don't see "reply" under this comment like I don't for yours, you can go to my profile page and "comments" and then you will see the "reply" link.
drumdance 11y ago
A mass selloff would depress the stock price, which in turn could lead to more people dumping the stock, creating a downward spiral. Not only would this hurt the company's investors, it would seriously impact their ability to raise capital in the future. (Though that's probably true anyway if the banks decide to call the loan. By doing so they're basically saying they don't believe the company can repay its debts, and other potential lenders would either stay away or demand more onerous terms.) Note I said "could" -- the actual effects depend on how much stock is being pledged and how quickly banks would try to dump it. Regardless, it would be huge negative news and affect the stock price negatively. Look at how Apple's stock got punished because iPhone sales have stopped growing.