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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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Noriyuki Saitoh
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Art
Japanese Artist Crafts Intricate Insects Using Bamboo
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Noriyuki Saitoh

Not everyone finds insects beautiful. Some people think of them as scary, disturbing, or downright disgusting. But when Japanese artist Noriyuki Saitoh looks at a discarded cicada shell or a feeding praying mantis, he sees inspiration for his next creation.

Saitoh’s sculptures, spotted over at Colossal, are crafted by hand from bamboo. He uses the natural material to make some incredibly lifelike pieces. In one example, three wasps perch on a piece of honeycomb. In another, two mating dragonflies create a heart shape with their abdomens.

The figures he creates aren’t meant to be exact replicas of real insects. Rather, Saitoh starts his process with a list of dimensions and allows room for creativity when fine-tuning the appearances. The sense of movement and level of detail he puts into each sculpture is what makes them look so convincing.

You can browse the artist’s work on his website or follow him on social media for more stunning samples from his portfolio.

Bamboo insect.

Bamboo insect.

Bamboo insect.

Bamboo insect.

Bamboo insect.

Bamboo insect.

[h/t Colossal]

All images courtesy of Noriyuki Saitoh.

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History
P.G. Wodehouse's Exile from England
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Hulton Archive/Getty Images

You don’t get more British than Jeeves and Wooster. The P.G. Wodehouse characters are practically synonymous with elevenses and Pimm’s. But in 1947, their creator left England for the U.S. and never looked back.

Pelham Grenville Wodehouse, better known as P.G., was living in northern France and working on his latest Jeeves and Wooster novel, Joy in the Morning, when the Nazis came knocking. They occupied his estate for a period of time before shipping him off to an internment camp in Germany, which he later said he found pretty pleasant:

“Everybody seems to think a German internment camp must be a sort of torture chamber. It was really perfectly normal and ordinary. The camp had an extraordinarily nice commander, and we did all sorts of things, you know. We played cricket, that sort of thing. Of course, I was writing all the time.”

Wodehouse was there for 11 months before being suddenly released to a hotel in Berlin where a man from the German foreign office named Werner Plack was waiting to meet him. Wodehouse was somewhat acquainted with Plack from a stint in Hollywood, so finding him waiting didn't seem out of the ordinary. Plack advised Wodehouse to use his time in the internment camp to his advantage, and suggested writing a radio series about his experiences to be broadcast in America.

As Plack probably suspected, Wodehouse’s natural writing style meant that his broadcasts were light-hearted affairs about playing cricket and writing novels, This didn’t sit too well with the British, who believed Wodehouse was trying to downplay the horrors of the war. The writer was shocked when MI5 subjected him to questioning about the “propaganda” he wrote for the Germans. "I thought that people, hearing the talks, would admire me for having kept cheerful under difficult conditions," he told them in 1944. "I would like to conclude by saying that I never had any intention of assisting the enemy and that I have suffered a great deal of mental pain as the result of my action."

Wodehouse's contemporary George Orwell came to his aid, penning a 1945 an essay called “In Defense of P.G. Wodehouse." Sadly, it didn’t do much to sway public opinion. Though MI5 ultimately decided not to prosecute, it seemed that British citizens had already made up their minds, with some bookstores and libraries even removing all Wodehouse material from their shelves. Seeing the writing on the wall, the author and his wife packed up all of their belongings and moved to New York in 1947. They never went back to England.

But that’s not to say Wodehouse didn’t want to. In 1973, at the age of 91, he expressed interest in returning. “I’d certainly like to, but at my age it’s awfully difficult to get a move on. But I’d like to go back for a visit in the spring. They all seem to want me to go back. The trouble is that I’ve never flown. I suppose that would solve everything."

Unfortunately, he died of a heart attack before he could make the trip. But the author bore no ill will toward his native country. When The Paris Review interviewed Wodehouse in 1973, they asked if he resented the way he was treated by the English. “Oh, no, no, no. Nothing of that sort. The whole thing seems to have blown over now,” he said.  He was right—the Queen bestowed Wodehouse with a knighthood two months before his death, showing that all was forgiven.

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