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Shorts drive the price down, making it more expensive for the company to borrow from the market by selling stock. They have to sell more shares to receive a si

Shorts drive the price down, making it more expensive for the company to borrow from the market by selling stock. They have to sell more shares to receive a similar amount.

simias 8y ago
I obviously lack a piece of the puzzle here, let me see if I get this right: a short means borrowing stock, selling it then rebuying it later (betting that the price would have fallen in order to turn a profit) before giving it back to its original owner. I suppose if everybody shorts at the same time the huge amount of stock being sold could drive the price momentarily down, but then again the opposite happens when the stock is re-bought. So in the end it should be effectively zero-sum? Or is it just that a huge amount of people started shorting the stock at the same time which made it a sort of self-fulfilling prophecy?
- cardiffspaceman 8y ago
  Hopefully, the sale to start the position and the purchase to close it do not move the market themselves. People do long positions without moving the market (affecting the price). Sorry if I explained anything to anyone who already knew it.
- r2d2-c3po 8y ago
  They wouldn't have to buy it back immediately. Short sellers would borrow the stock from a long and pay a predetermined interest rate for however long they're borrowing it. They technically don't have to rebuy the stock unless they get margin called (if the collateral posted is no longer deemed sufficient for the counterparty to allow the borrowing position) or need to close out positions because of some risk tolerance threshold being met. Usually when this happens to a bunch of shorts at the same time they must all rebuy, driving prices higher, which is called a short squeeze, but it is usually determined by someone cutting losses on a short position or positive news coming out driving prices up.
- pcmonk 8y ago
  That's equivalent to saying that buying a stock doesn't move the price up because you'll have to sell it eventually. A lot of people in long positions means a lot of buys that haven't been re-sold. A lot of people in short positions means a lot of sells that haven't been re-bought.
- tomatocracy 8y ago
  Actually, short selling has another nasty sting in the tail. If there are few willing sellers out there when everybody goes to cover their short, you get a short squeeze - a feedback loop where the price increases, so people need to buy to cover shorts to avoid losses, which pushes the price up, which means more people need to buy to avoid further losses as the price rises and so on. The original owner who lent the stock can also ask for it back on relatively short notice (say, because they are long and want to sell). Usually this isn't a problem because the short finds someone else to borrow from and uses that to cover - but if enough people do that then it can trigger a short squeeze even without significant price movement at the beginning, as happened rather dramatically in Porsche shares in 2008.
- stephengillie 8y ago
  Shorting a stock is like renting a car for a year, and selling it - because you think you can buy another car in a year, and still make money after paying the rental company. This is possible in this example because all cars are identical.
Latteland 8y ago
Also the shorts try to push the stock down via endless false rumors (there are real challenges to tesla of course) about bad cars, crashes, fires, etc, and those false rumors must prevent some people who just don't have time for so much drama from looking into them.
- wgerard 8y ago
  That's a realllly simplistic and one-sided view of short sellers.
  - Latteland 8y ago
    They aren't all trying to do that of course, a lot of people are just trying to make money and look at a stock and think it will go one way or another. But I don't like the people that push false narratives and convince people of things that aren't related to reality.
    - wgerard 8y ago
      > They aren't all trying to do that of course The vast majority of them aren't trying to do that, similar to how the vast majority of longs aren't trying to P&D. > But I don't like the people that push false narratives and convince people of things that aren't related to reality. I hope you see the irony in saying that: This is almost word-for-word what Tesla shorts accuse Tesla of.
      - Latteland 8y ago
        And shorts I guess keep down voting my comments but I hate that musk posted that, and he better be able to document why he felt that was true.
- rootusrootus 8y ago
  Nah, what really happens is that there are so many short positions that the stock is notable for just how many people are shorting it, and that itself becomes the negative news. You don't have to write a single 'fake news' story to get that effect.
refurb 8y ago
Shorts drive the price down Not on their own they don't. You can go and short Facebook right now and it won't move the price at all.
- rootusrootus 8y ago
  Not individually, but if enough people short it, then that becomes a signal to other investors that maybe there's something they don't know about, which will push the price down.
  - deleted 8y ago
    [deleted]
  - lamontcg 8y ago
    And other investors see that short interest piling into an otherwise healthy (hypothetical) stock and they buy in anticipation of a short squeeze. And when the stock pops due to good news, those shorts become rocket fuel for the stock going up. No single action in the stock market happens in a vacuum, and longs will absolutely react to what the shorts are doing. And a high short interest is often viewed as a contrarian indicator that dumb short money has piled into the stock and that its actually due for a pop. You often see that at bottoms in the stock.
- qaq 8y ago
  Sure it does short 20% of FB float it will sure move
  - hcknwscommenter 8y ago
    I'm not so sure. What direction will it "sure move" if you short 20% of FB float? You have to borrow a stock to short it from someone, so the stock that you short is not actually sold just lent.
    - qaq 8y ago
      It's lent but you just artificially increased the volume because otherwise someone would have to sell actual shares.
tomatocracy 8y ago
It doesn't make it "more expensive" for the Company (as opposed to its existing shareholders) raising equity capital unless the stock pays a dividend and the only way they can sell more stock is to promise buyers they won't reduce the dividend per share to compensate for the increased number of shares in issue. Tesla doesn't pay a dividend, so that isn't the case here. In extremis, a falling/low price could limit the size of a potential new equity fundraising because the resulting dilution is too much for existing shareholders to take, but Tesla's price/valuation would appear to put it quite far from this being an issue.
- zwerdlds 8y ago
  Key point: I was trying to explain this to someone who had no idea of what a short is. I didn't want to muddy the issue with complex descriptions of equity, dividends etc. But if you think of equity as having a value other than derived from the market, then 'expensive' might still have applicability here. It's been a long time since I've used this though.

Shorts drive the price down, making it more expensive for the company to borrow from the market by selling stock. They have to sell more shares to receive a similar amount.

simias 8y ago

I obviously lack a piece of the puzzle here, let me see if I get this right: a short means borrowing stock, selling it then rebuying it later (betting that the price would have fallen in order to turn a profit) before giving it back to its original owner. I suppose if everybody shorts at the same time the huge amount of stock being sold could drive the price momentarily down, but then again the opposite happens when the stock is re-bought. So in the end it should be effectively zero-sum? Or is it just that a huge amount of people started shorting the stock at the same time which made it a sort of self-fulfilling prophecy?

cardiffspaceman 8y ago
Hopefully, the sale to start the position and the purchase to close it do not move the market themselves. People do long positions without moving the market (affecting the price). Sorry if I explained anything to anyone who already knew it.
r2d2-c3po 8y ago
They wouldn't have to buy it back immediately. Short sellers would borrow the stock from a long and pay a predetermined interest rate for however long they're borrowing it. They technically don't have to rebuy the stock unless they get margin called (if the collateral posted is no longer deemed sufficient for the counterparty to allow the borrowing position) or need to close out positions because of some risk tolerance threshold being met. Usually when this happens to a bunch of shorts at the same time they must all rebuy, driving prices higher, which is called a short squeeze, but it is usually determined by someone cutting losses on a short position or positive news coming out driving prices up.
pcmonk 8y ago
That's equivalent to saying that buying a stock doesn't move the price up because you'll have to sell it eventually. A lot of people in long positions means a lot of buys that haven't been re-sold. A lot of people in short positions means a lot of sells that haven't been re-bought.
tomatocracy 8y ago
Actually, short selling has another nasty sting in the tail. If there are few willing sellers out there when everybody goes to cover their short, you get a short squeeze - a feedback loop where the price increases, so people need to buy to cover shorts to avoid losses, which pushes the price up, which means more people need to buy to avoid further losses as the price rises and so on. The original owner who lent the stock can also ask for it back on relatively short notice (say, because they are long and want to sell). Usually this isn't a problem because the short finds someone else to borrow from and uses that to cover - but if enough people do that then it can trigger a short squeeze even without significant price movement at the beginning, as happened rather dramatically in Porsche shares in 2008.
stephengillie 8y ago
Shorting a stock is like renting a car for a year, and selling it - because you think you can buy another car in a year, and still make money after paying the rental company. This is possible in this example because all cars are identical.

Latteland 8y ago

Also the shorts try to push the stock down via endless false rumors (there are real challenges to tesla of course) about bad cars, crashes, fires, etc, and those false rumors must prevent some people who just don't have time for so much drama from looking into them.

wgerard 8y ago
That's a realllly simplistic and one-sided view of short sellers.
- Latteland 8y ago
  They aren't all trying to do that of course, a lot of people are just trying to make money and look at a stock and think it will go one way or another. But I don't like the people that push false narratives and convince people of things that aren't related to reality.
  - wgerard 8y ago
    > They aren't all trying to do that of course The vast majority of them aren't trying to do that, similar to how the vast majority of longs aren't trying to P&D. > But I don't like the people that push false narratives and convince people of things that aren't related to reality. I hope you see the irony in saying that: This is almost word-for-word what Tesla shorts accuse Tesla of.
    - Latteland 8y ago
      And shorts I guess keep down voting my comments but I hate that musk posted that, and he better be able to document why he felt that was true.
rootusrootus 8y ago
Nah, what really happens is that there are so many short positions that the stock is notable for just how many people are shorting it, and that itself becomes the negative news. You don't have to write a single 'fake news' story to get that effect.

refurb 8y ago

Shorts drive the price down Not on their own they don't. You can go and short Facebook right now and it won't move the price at all.

rootusrootus 8y ago
Not individually, but if enough people short it, then that becomes a signal to other investors that maybe there's something they don't know about, which will push the price down.
- deleted 8y ago
  [deleted]
- lamontcg 8y ago
  And other investors see that short interest piling into an otherwise healthy (hypothetical) stock and they buy in anticipation of a short squeeze. And when the stock pops due to good news, those shorts become rocket fuel for the stock going up. No single action in the stock market happens in a vacuum, and longs will absolutely react to what the shorts are doing. And a high short interest is often viewed as a contrarian indicator that dumb short money has piled into the stock and that its actually due for a pop. You often see that at bottoms in the stock.
qaq 8y ago
Sure it does short 20% of FB float it will sure move
- hcknwscommenter 8y ago
  I'm not so sure. What direction will it "sure move" if you short 20% of FB float? You have to borrow a stock to short it from someone, so the stock that you short is not actually sold just lent.
  - qaq 8y ago
    It's lent but you just artificially increased the volume because otherwise someone would have to sell actual shares.

tomatocracy 8y ago

It doesn't make it "more expensive" for the Company (as opposed to its existing shareholders) raising equity capital unless the stock pays a dividend and the only way they can sell more stock is to promise buyers they won't reduce the dividend per share to compensate for the increased number of shares in issue. Tesla doesn't pay a dividend, so that isn't the case here. In extremis, a falling/low price could limit the size of a potential new equity fundraising because the resulting dilution is too much for existing shareholders to take, but Tesla's price/valuation would appear to put it quite far from this being an issue.

zwerdlds 8y ago
Key point: I was trying to explain this to someone who had no idea of what a short is. I didn't want to muddy the issue with complex descriptions of equity, dividends etc. But if you think of equity as having a value other than derived from the market, then 'expensive' might still have applicability here. It's been a long time since I've used this though.