Shorting in simple terms works this way:
1. You need a shareholder who believes the company is a great long term secure investment.
2. You need a shorter who thinks that in the short term the price of the share held by 1. above will drop.
3. The shorter goes to the shareholder and says will you lend me your shares?
4. The shareholder says yes and requests the following:
a) Security for the value of the lent shares likely a bank guarantee backed by a mortgage;
b) A fee based on the agreed length of the loan and that fee is paid at the time of lending the shares;
c) An agreement that at the end of the agreed term a further fee will be payable calculated on a daily basis until the lent shares are returned;
d) The shareholder lends the shares and immediately the shorter sells the shares on market locking in the value of the lent shares. The shorter keeps the money from the sale of the shares.
e) The shorter then waits for the shares to drop in price to the point where he can buy back the number of lent shares and pocket the difference between what he sold the shares for and what he bought them back for and hopes that after deducting all the fees and brokerage he is left with a profit.
Now this all seems reasonable if everyone plays by the rules but obviously the bigger the fall in the share price after entering the agreement and selling the shares the better so enter the illegal manipulators to help the short manipulate the market and panic retail into selling so they cause the share price to drop further than it would have but for the manipulation.
Then consider this issue.
I have said moving up the ASX just brings bigger and more professional shorting.
We hear all the time the statement “look institutions have been buying they now have more shares but why hasn’t the price gone up?”
Simple a wealthy institutional shorter goes to an institution A. that holds shares in a target company in which they are interested.
They at the same time go to Institution B. who they know is interested in building a position in their target company. They say to this company would you like to take ‘x’ number of shares in this company off my hands at the current market price.
This company says yes because they know if they buy on market they will put upward pressure on the price.
So they agree to pay the Institutional short a commission and Institution A. the Institutional short and Institution B. play
off-market pass the parcel and everybody wins. No increased market pressure pushing up the price.
The share price falls with a little help and the short institution buys back the shares and returns them to institution A.
Institutional ownership in the target company has doubled.
The short institution has a nice profit.
Retail sit scratching their heads as to why all this institutional buying has not pushed up the price instead the price has fallen.
Sorry everybody but poor old retail who get panicked and sell at a loss wins.
But who cares about retail as long as the big boys are happy. Hey what pass me the Financial Times Chauncey. There’s a good fellow.
My opinion only DYOR
FF
AKIDA BALLISTA