Short selling

“ By short selling, we mean selling a stock that you do not possess, with the intention of buying it later. Short selling in general business is very common, and we think nothing of it. Manufacturers frequently sell goods that are not yet made, to be delivered at some future time. Selling stocks short is a similar transaction, except that in a majority of cases delivery of the stock must be made immediately.
However, your broker can attend to that by borrowing the stock. As explained in the preceding chapter, when the market is active most of the trading is done on margin. ”

“ He saw through the time-worn device of the fictitious short selling. He knew the only people who would dare sell such a large amount must be his colleagues. He also was convinced that their breach of faith was not a concerted effort, because if they had discussed the matter they would have sold a smaller quantity. He knew where nearly every share of the stock was. ”

“ Short-sellers endeavor to select times when prices seem high in order to sell, and times when prices seem low in order to buy, their action in both cases serving to lessen advances and diminish declines of price. In other words, short-selling tends to produce steadiness in prices, which is an advantage to the community. ”

“ As the governors of the Stock Exchange stated to the Hughes Commission in 1909, short selling is of different descriptions. There is the short sale where the security is held in another country and sold to arrive pending transportation. There is the short sale where an individual sells against securities which he expects to have later, but which are not in deliverable form ”

“ The philosophy of short selling is simple; it really amounts to betting 41that values will decline. A man who “sells short” sells what he does not possess, but hopes to buy, later on, at a lower price. But since he must deliver what he sells he borrows it from some one else, giving the lender ample security. To “cover” or to “buy in” is to purchase stock previously sold short. Obviously, it is unwise to be short of a stock which is held by such a few that it may be difficult to borrow it. To “squeeze” shorts is to advance the price in order to force “covering.” ”

“ The short seller contracts to deliver at a certain price a certainShort selling Is it justifiable? quantity of stocks which he does not own at the time, but which he expects the course of the market to permit him to buy at a profit. ”

“ The coming of cold storage, and the development of the canning industry have, I am informed by a colleague in the Harvard Business School, enormously increased this speculation among both wholesalers and retailers, and it is very important in most wholesale lines. There is short-selling in materials for construction purposes, and in metals, apart from organized exchanges, and, where possible, contractors in the building trade often protect themselves by means of future contracts with speculators who are selling short. ”

“ Buying for future delivery causes advances in prices; selling short tends to restrain inordinate advances. In each case there must be a buyer and a seller and the interaction of their trading steadies prices. Speculation thus brings into the market a distinct class of people possessing capital and special training who assume the risks of holding and distributing the proceeds of the crops from one season to another with the minimum of cost to producer and consumer. ”

“ The system of selling short, however, which gave birth to the idea of creating corners, and which came into vogue in the fifties, has never ceased to be a leading factor on the stock exchange. It was the result of certain inflations of values which necessarily follow the construction of great enterprises. However high a valuation may be set upon any given commodity, there are always persons who expect a higher price. Early historical examples of this fact are the South-Sea shares and John Law’s Mississippi shares, over which England and France respectively went crazy in the last century. ”

“ This practice is even less damaging to the customer than the one of actually executing the buying order for the customer at the time the order is given and then selling the stock right back on the market again for the account of the broker or his pal—the usual practice when the object of going short is sought. When a broker buys stocks in the market he must bid for them, and actual purchase generally means a higher cost price to the customer than that at standing quotations. ”

“ The moment the Scheftels bid of $1.50 a share made its appearance on the Curb and the selling from the same source for the account of customers was discontinued, it was seen that the force of the drive had spent itself, at least for the time being. Support now came from the "shorts." They started to cash their profits on their short sales of the days previous. Crazed selling was transformed to frantic buying. ”

“ It is also true that, although high prices and low prices are immaterial at any one time, the change from one to the other, from one period of time to another, affects the burden of outstanding time contracts. Men make contracts for dollars, not for dollar's-worths. Selling long or short is one thing ”

“ Men of Wall Street, it is impossible to prevent the repetition of those acts by which in five years I have accumulated a billion dollars, impossible so long as a short sale or a repurchase and resale, is allowed. When short sales, and repurchases and resales, are made impossible, stock speculation will be dead. ”

“ We have been strongly urged to advise the prohibition or limitation of short sales, not only on the theory that it is wrong to agree to sell that what one does not possess, but that such sales reduce the market price of the securities involved. ”

“ When a stock is headed downward in price, the offer of another large block at a lower price than yet offered has a strong tendency to force the price still lower, for scared investors who really own large blocks of the stock may become panic-stricken and close out their holdings of that particular stock at any price they can obtain.
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Thus, a “short operator” may offer, in a falling market, ten thousand shares of a certain stock at 67. ”

“ It may sometimes happen that the fall in price never reaches the consumer, but stops short with the wholesale or retail trader, although this tendency is to some extent counteracted by the competition in retail trade. ”

“ I notice that you have gone just far enough in the selling game to discover that your goods are higher priced than every competitor’s; the merchants overloaded; business on the bum; the office manager a crab; the credit man hard-boiled and the plant unappreciative of what a salesman is up against.
Well—now, isn’t that just too bad! But doesn’t it occur to you that with everything so badly messed up, it is strange that the firm continues to worry along and pay dividends on its stock, year after year? ”

“ When the demand exceeds the vendible supply, obviously the price rises; when the supply for sale exceeds the demand, a fall results. But the average selling price of a big line may be high enough to make the operation profitable, even though a decline occurs during the course of the selling. ”

“ Even a small share in the lucky street, where fortunes could be made in an hour, rose to fabulous value. Houses formerly letting for forty pounds a year now fetched eight hundred pounds per month. And no wonder, when shares of the face value of five hundred livres sold for ten thousand! When there is such an overwhelming desire to buy, then is the opportunity for sellers to realise, and the time for such speculation on the one side, and for such commerce on the other, is naturally short and the need pressing. ”

“ The fluctuations in the price of the funds, which were frequent in those unsettled times, presented an irresistible temptation to buying and selling for the account—a process by means of which a small capital may be made to represent fictitiously an enormous amount of stock: no transfers being required, and in fact no sales created, the real stake being the difference between the buying and the selling prices. ”

“ They would rather leave it, and get such goods as they wanted, than take a lower price in cash, and that has got to be the rule. They are very fond of getting the highest nominal value; and I can show from my books that, as a rule, I give the full price for each article which we charge in selling them, and have only a profit on the goods we give in exchange. ”

“ The purchase of stocks through a broker, though the party ordering such purchase does not intend to hold the stocks as an investment, but expects the broker to carry them for him with the design on the part of the purchaser to sell again the stocks when their market value has enhanced is, however, speculative, entirely legal. Equally so is a ‘short sale,’ where the seller has not the stock he assumes to sell, but borrows it and expects to replace it when the market value has declined. ”

“ The operations of the ‘bear,’ however, make excessive inflation extremely expensive, and similarly tend to prevent a violent smash because the ‘bear,’ to realize his profits, must become a buyer. The writer has been told by several members of the New York Stock Exchange that they have seen days of panic when practically the only buyers, who were taking the vast volume of securities dumped on the exchange, were those who had sold ‘short,’ and who now turned buyers as the only way of closing their transactions. ”

“ Then there are the apple-merchants, with their fruit of all colors, from the pale yellow green to the bright crimson, and the baskets ranged in rows on the pavement before the little shops. Round these the customers stand examining the stock, then whispering together over their bargain, and counting their money. "Give you four shillings for this here lot, master," says a coster, speaking for his three companions. "Four-and-six is my price," answers the salesman. "Say four, and it's a bargain," continues the man. ”

“ Or, on the contrary, the competition may cease before the value has risen in even the proportion of the deficiency. A rise, short of one-third, may place the article beyond the means, or beyond the inclinations, of purchasers to the full amount. At what point, then, will the rise be arrested? At the point, whatever it be, which equalizes the demand and the supply: at the price which cuts off the extra third from the demand, or brings forward additional sellers sufficient to supply it. ”

“ It is a common thing to read about the short interests in certain stocks. All stocks that are sold short must be bought sooner or later, and when that buying takes place, it may affect the market very much. Therefore, if it is known that there is a big short interest in a certain stock, we should expect the stock to sell at a higher price; but sometimes the short interests break the market and force the price down, especially when general conditions are in their favor. ”

“ In a competitive situation, each seller will cut his price in order to increase his share of the market, and prices will ultimately stabilize at a competitive level-i.e., price will equal cost, including a reasonable return on capital. Obviously, it would be to a seller's benefit to avoid such price competition and maintain prices at a higher level, with a corresponding increase in profit. In a market with very few sellers, and detailed knowledge of each other's price, such action is possible. ”

“ As if bearing this out it was noted that during the last ten days of each month, the firm holding the contract did its utmost to manipulate a rise in price, which would, of course, inure greatly to its benefit.
These changes taking from us the legitimate demand from so many consumers, made our business far more speculative. Instead of buying to supply a regular trade, our purchases were made largely to be resold in wholesale lots to dealers or others, and the profit would depend on an advance in the market following the purchase. If the market favored us the business was profitable ”

“ We recognize a short-loan market, a stock exchange, a number of "markets" where lenders and borrowers are brought together by the aid of various intermediaries, such as banks, bill brokers, and stock jobbers, who correspond to dealers in commodities. ”

“ Where they really made their money was either in buying large blocks of securities at less than their value, or, more commonly, in selling new issues, after a long course of artificial demand and advertisement, at very much more than they had ever paid for them. ”

“ A financially embarrassed company may announce an assessment of its stockholders, upon which there is a rush to sell the stock; a little further explanation shows that the proceeds of the assessment will so improve the facilities of the company, or so enable it to reduce its fixed charges, as to make the stock intrinsically far more valuable than it was before; this discovery causes a sharp advance in the shares, and the “short” sellers have to cover their sales at a loss. ”

“ Sell on a rising market, but do not stop selling because the market ceases to rise. A great part of the art of business is the selling capacity and the organisation of sales, but to carry out a preordained system of selling on an abstract theory is mere folly. To cease selling just because the market is not rising at a given moment, and to wait for a better day—which may not dawn—is to burden a firm unduly with the carrying of stocks and commodities. ”

“ As most merchants are content with much less than 30 per cent., he will be able, if he wishes, to forego some of that profit, lower the price of the commodity, and drive the old-fashioned trader—the man who trades on his own capital—out of the market. In modern English business, owing to the certainty of obtaining loans on discount of bills or otherwise at a moderate rate of interest, there is a steady bounty on trading with borrowed capital, and a constant discouragement to confine yourself solely or mainly to your own capital. ”