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Prime brokerage transactions: Difference between revisions
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===[[Short selling]]=== | ===[[Short selling]]=== | ||
So imagine you want to ''sell'' a share, because you think it is rubbish, but you don’t own it. An [[GameStop|antediluvian, mall-based, physical retailer of computer games]], for example. It’s trading at bugger all, it is unsalvageable, and | Short selling is a means to anti-investing: it is what you do if you want to bet ''against'' the price of a stock rising. | ||
So imagine you want to ''sell'' a share, because you think it is rubbish, ''but you don’t own it''. An [[GameStop|antediluvian, mall-based, physical retailer of computer games]], for example. It’s trading at bugger all, it is unsalvageable, and there is totally risk-free money to be made betting against it.<ref>You ''will'' note the ironic tone here, won’t you. Sarcastic, in fact.</ref> If only you could sell it, but not have to buy it first, you could profit if — ahh, ''when'', right? — the share went down in value. This is like the ''opposite'' of investing in a share. What you need is someone who will ''lend'' a security they own — this is called a [[stock loan]] — that you can then sell. When, as you are certain it will, the share plummets in value, you can buy another one in the market at the new low price, give it back to your friend, and everyone is happy! You will have made a bucket! | |||
That friend is your [[prime broker]]. But, again, there is a catch. What if the share goes ''up'' in value? Your prime broker will want [[margin]] to cover against that risk. The more it goes up, the more you will have to pay. It is amazing how Redditors can make it go up. Mean time your prime broker will make you give it the sale proceeds of the shares to look after for you, as margin, and, to reduce that financing cost. If there turn out to be a ''lot'' of people on Reddit — even little, stupid ones who don’t have an [[MBA]] and don’t care for the subtleties of market fundamentals or, for that matter, even know there ''are'' any — you may find yourself running out of money to post as [[margin]]. Your prime broker will not see the funny side of this and you will find yourself living under a bridge while people on [[Twitter]] — stupid, misunderstanding people — will make fun of you. Think carefully before betting wildly against the internet. | That friend is your [[prime broker]]. But, again, there is a catch. What if the share goes ''up'' in value? Your prime broker will want [[margin]] to cover against that risk. The more it goes up, the more you will have to pay. It is amazing how Redditors can make it go up. Mean time your prime broker will make you give it the sale proceeds of the shares to look after for you, as margin, and, to reduce that financing cost. If there turn out to be a ''lot'' of people on Reddit — even little, stupid ones who don’t have an [[MBA]] and don’t care for the subtleties of market fundamentals or, for that matter, even know there ''are'' any — you may find yourself running out of money to post as [[margin]]. Your prime broker will not see the funny side of this and you will find yourself living under a bridge while people on [[Twitter]] — stupid, misunderstanding people — will make fun of you. Think carefully before betting wildly against the internet. | ||