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Prime brokerage transactions: Difference between revisions
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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 it is totally free money betting against it.<ref>You will not the irony here, won’t you.</ref> If only you could sell it, but not have to buy it first, you could make money if the share went down in value. This is like the ''opposite'' of investing in a share. What you need is someone who will let you ''borrow'' a security they own, that you can sell. When, as you are certain it will, it 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 have made a bucket! What could possibly go wrong? | 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 it is totally free money betting against it.<ref>You will not the irony here, won’t you.</ref> If only you could sell it, but not have to buy it first, you could make money if the share went down in value. This is like the ''opposite'' of investing in a share. What you need is someone who will let you ''borrow'' a security they own, that you can sell. When, as you are certain it will, it 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 have made a bucket! What could possibly go wrong? | ||
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 have to pay. | 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. | ||
===[[Equity derivative]] (aka [[contract for difference]])=== | ===[[Equity derivative]] (aka [[contract for difference]])=== | ||
Now imagine you wanted to do all the above, but without actually buying or selling any shares at all! Couldn’t you just have a | Now imagine you wanted to do all the above, but without actually buying or selling any shares at all! Couldn’t you just have a “derivative” or swoppy thing of some sort, that paid you the same amount that you would have got had you bought or shorted the shares? This is known as “[[synthetic prime brokerage]]”. | ||
{{sa}} | {{sa}} | ||
*[[Prime brokerage charging]] | *[[Prime brokerage charging]] | ||
*[[Prime brokerage]] | *[[Prime brokerage]] | ||
*[[GameStop]] | *[[GameStop]] | ||
{{ref}} | |||