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Our free(ish) market becomes less free with the ban of short selling October 2, 2008

Posted by Jeff Nabers in : Money, Self Directed IRA Solo 401k , add a comment

A couple of weeks ago, the SEC illegalized a type of investing that makes a market what it is – short selling. Simply put, a person can bet on the market going up by “going long” and buying securities in hopes of selling them for a higher price at a later date. Long positions can be leveraged by margin. A person can bet on certain stocks going down by selling them if he already owns them. The leveraged way to bet on the market going down is to “sell short” which is simply selling stock on margin.

Going long makes prices go up. Selling short makes prices go down. This is part of “price discovery”. Most people don’t even know about short selling or they’ve been convinced to not do it. Securities brokers don’t want people to know about investment strategies that will make market valuations go down because their commissions are tied to market valuations. Their entire system is a mechanism of inflating values to further inflate values.

SEC temporarily bans short selling of companies whose price will go down

Read the official SEC action here. They are, by force of law, inflating the value of the stock market. They are also prohibiting (more…)

Self Honesty: Stock Market Strategies Worth Considering June 6, 2008

Posted by Jeff Nabers in : Self Directed IRA Solo 401k , add a comment

While I generally avoid mutual funds like the plague, I don’t avoid the stock market altogether. I’ll split what I do in the stock market into two categories: long and short. Either way, I’m honest with myself in admitting that no matter what I do in the stock market, it will be speculative and risky.

Long

“Going long” means buying a stock and expecting its price or income to rise so I can sell later for a profit. There are millions of people who have access to the same information as you, and that is generally reflected in the price of that stock. If you know something non-public about the company, trading it may be illegal for you. I’ve bought individual stocks before; I just treat the situation honestly; it is speculative in nature, and I only make such trades with very small portions of my portfolio.

I don’t go long on mutual funds because I don’t know what I’m going long on. It is virtually impossible to know what I’m actually investing in when I buy shares of a fund.

Short

Selling Short… A short position is the opposite of a long one. Instead of buying low and selling high, selling short is a matter of selling high and then buying low. For me to do this, I borrow shares of a stock and simultaneously sell them at the market price in expectation of a price decrease. To close this position later, I just have to buy back shares of the same stock at the then market price and pay back the borrowed stock. If during my position the stock price declined, I profit; if the stock price increased, I have a loss.

Ex: ABC Company seems to be doomed. It’s currently trading at $50, but I think it will go much lower over the next couple months. I sell 100 shares short. This means I borrow 100 shares and simultaneously sell them for $5,000. A few months later I see the stock price has declined to $35. To close my position, I buy 100 shares back for $3,500. I pay back the borrowed shares and retain the $1,500 profit, less fees and commissions.

I like short selling more than going long. I often notice (more…)