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How to Sell Short (And Why? And When?)

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Perhaps you've read about the ban on short selling. Many believe it is one of the main causes of the current financial crisis and the fall of Bear Stearns, Lehman Brothers, and AIG. But what exactly is "short selling"? How and when can you do it? And why is it so frowned upon?

When to sell short. You sell short when you think that a certain stock price is going to fall, and you'd like to profit from that premonition.


How to sell short. Say you know something about a certain stock that nobody else does. Let's use Apple. You were a tester for the new iPhone, which you found malfunctioned. You know that upon release of the phone tomorrow, Apple's stock price will fall. You want to profit off of this, but you don't own any AAPL shares. Or you do, but not as many as you'd like.

So you borrow AAPL stock from someone else's account. Let's call him Joe. Your broker can help you do this "“ take 100 AAPL shares out of his client, Joe's, account (without Joe knowing about it) and give them to you. You sell those 100 shares at $140.90 each, today's share price. The next day the new iPhone comes out, it bombs, and as you thought, shares fall to $100. (Dramatic, yes, but go with it). The next week, you think Apple's share price will rise, so you buy back those 100 shares at $100 and give them back to Joe's account. You've just made a sweet $4,090 in profit. To sum it up: you borrow shares of stock from someone else's account. Sell them. Then buy them back at a (hopefully) lower price and return them to the account from which you borrowed.

Why sell short? One reason, as described above, is to speculate. If you think a stock or the market as a whole is overpriced, you can make money off of it. A second reason is to hedge "“ to protect yourself from unexpected losses. That is, if you're long AAPL but want to take a little less risk, you might want to short another security in the computer industry, which includes risk inherent to Apple.

You probably shouldn't sell short. Now I'm not recommending you actually do this, unless you are well versed in the markets. It's pretty risky. If Joe decides he wants to do something with these shares, he can call you on it. At that moment you'll have to cover, which means you'll have to buy back the shares you borrowed from him and put them back into his account. So "“ say AAPL price actually rose and you were called when it was $160.90. Then you would have lost $2,000.

Even if you want to, right now you can't. I also don't recommend you do this, because right now you can't. The SEC just put a ban on short-selling. After allegations that short sellers have led to the failures of Lehman, Bear, and the like, the SEC stepped in last Thursday and issued a temporary ban on short selling for 799 financial stocks. It's alleged that short sellers often use false information and conspire to drive down the price of the stock.

This isn't the first time we've placed a ban on short sellers. Short sellers were blamed for the Wall Street crash of 1929. Congress reacted by enacting a law, referred to as the "uptick rule," which banned sellers from shorting during a downturn. Sellers could not short a share when the stock was selling for lower than the previous trade. This kept short sellers from adding downward momentum of a stock when it was already sharply declining. After almost 80 years, the ban was lifted in 2007, when the SEC determined the markets were orderly enough that they didn't need the restriction (this is despite the fact that just two years prior in 2005, the SEC sought to restrict short-selling outright).

The history of short-selling takes us back earlier than the Great Depression, however. In 1609, Isaac Le Maire, a Dutch trader, made the first short. He was concerned about threats of attack by English ships and shorted shares of the Dutch East India Company, the first multinational corporation and the first company to issue stock. The Dutch stock exchange did not approve of Le Maire's actions and temporarily banned short-selling.

Later, during the Dutch depression of the 1630s, speculators saw short-selling as a means to profit off of the economic downturn. The English reacted by banning short-selling completely.

Be sure to read more of what Diana learned today here.

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A Simple Way to Charge Your iPhone in 5 Minutes
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Spotting the “low battery” notification on your phone is usually followed by a frantic search for an outlet and further stress over the fact that you may not have time for a full charge. On iPhones, plugging your device into the wall for five minutes might result in only a modest increase of about three percent or so. But this tip from Business Insider Tech may allow you to squeeze out a little more juice.

The trick? Before charging, put your phone in Airplane Mode so that you reduce the number of energy-sucking tasks (signal searching, fielding incoming communications) your device will try and perform.

Next, take the cover off if you have one (the phone might be generating extra heat as a result). Finally, try to use an iPad adapter, which has demonstrated a faster rate of charging than the adapter that comes with your iPhone.

Do that and you’ll likely double your battery boost, from about three to six percent. It may not sound like much, but that little bit of extra juice might keep you connected until you’re able to plug it in for a full charge.

[h/t Business Insider Tech]

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Trying to Save Money? Avoid Shopping on a Smartphone
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Today, Americans do most of their shopping online—but as anyone who’s indulged in late-night retail therapy likely knows, this convenience often can come with an added cost. Trying to curb expenses, but don't want to swear off the convenience of ordering groceries in your PJs? New research shows that shopping on a desktop computer instead of a mobile phone may help you avoid making foolish purchases, according to Co. Design. Ying Zhu, a marketing professor at the University of British Columbia-Okanagan, recently led a study to measure how touchscreen technology affects consumer behavior. Published in the Journal of Retailing and Consumer Services, her research found that people are more likely to make more frivolous, impulsive purchases if they’re shopping on their phones than if they’re facing a computer monitor. Zhu, along with study co-author Jeffrey Meyer of Bowling Green State University, ran a series of lab experiments on student participants to observe how different electronic devices affected shoppers’ thinking styles and intentions. Their aim was to see if subjects' purchasing goals changed when it came to buying frivolous things, like chocolate or massages, or more practical things, like food or office supplies. In one experiment, participants were randomly assigned to use a desktop or a touchscreen. Then, they were presented with an offer to purchase either a frivolous item (a $50 restaurant certificate for $30) or a useful one (a $50 grocery certificate for $30). These subjects used a three-point scale to gauge how likely they were to purchase the offer, and they also evaluated how practical or frivolous each item was. (Participants rated the restaurant certificate to be more indulgent than the grocery certificate.) Sure enough, the researchers found that participants had "significantly higher" purchase intentions for hedonic (i.e. pleasurable) products when buying on touchscreens than on desktops, according to the study. On the flip side, participants had significantly higher purchase intentions for utilitarian (i.e. practical) products while using desktops instead of touchscreens. "The playful and fun nature of the touchscreen enhances consumers' favor of hedonic products; while the logical and functional nature of a desktop endorses the consumers' preference for utilitarian products," Zhu explains in a press release. The study also found that participants using touchscreen technology scored significantly higher on "experiential thinking" than subjects using desktop computers, whereas those with desktop computers demonstrated higher scores for rational thinking. “When you’re in an experiential thinking mode, [you crave] excitement, a different experience,” Zhu explained to Co. Design. “When you’re on the desktop, with all the work emails, that interface puts you into a rational thinking style. While you’re in a rational thinking style, when you assess a product, you’ll look for something with functionality and specific uses.” Zhu’s advice for consumers looking to conserve cash? Stow away the smartphone when you’re itching to splurge on a guilty pleasure. [h/t Fast Company]

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