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Mary953 (74.99)

Thank you for the early Christmas present!

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December 13, 2008 – Comments (13) | RELATED TICKERS: DIS , PG

You know that I am new to this site.  I have learned much since Thanksgiving and am eagerly learning as quickly as I can (although I do wish someone would explain to me what it means to "short the market", buy short, sell short, etc and how you do this, as it seems to be popping up more often this last week). 

I am still discovering new features that delight me but that are old to the rest of you.  I have found one more such feature.  When I am researching a stock, I start with those that I have some knowledge of, even if it is simply the knowledge of how I have used their products (P&G) or how they impact my world (Disney).  There are so many stocks that I cannot get a personal handle on though.  I look for news articles and for fool articles.  These help.  I have now, from sheer curiosity, found my way to "Fool Boards" on each stock information page.  There is nothing foolish about these, except in the "Foolish tradition".  First hand knowledge or logic, sometimes just musings about what might be, are very valuable.  They answer some questions and raise others.  I also now understand what the lightbulb charm is all about.  To all those who have helped or are about to -- Thank you so much for my early Christmas present.  It is just what I wanted and it is even the right size.

13 Comments – Post Your Own

#1) On December 13, 2008 at 11:35 AM, motleyanimal (83.85) wrote:

Whenever you come across a word or topic you need more information about, you can use the Fool FAQ. The link below will get you to a detailed description of short selling.

www.fool.com/FoolFAQ/FoolFAQ0033.htm

 

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#2) On December 13, 2008 at 11:37 AM, columbia1 wrote:

"to short the market", means you are betting the market will go down. If you have a broker and he can find a person willing to loan you his stock, you can short it. But for most of us, the simplest way is to buy "Puts" in the options markets. A put is a right to sell at a certain price. 

http://en.wikipedia.org/wiki/Put_option

When investors think the market (stock) is overbought, they will go short, instead of going long(which only means they are buying or have already bought, guessing the market, or stock will increase in value).

Hope this helps :)

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#3) On December 13, 2008 at 11:51 AM, Mary953 (74.99) wrote:

So there really is a way to "bet" that a stock will underperform the market in real life. Given that on most stocks, that is what I would choose right now, it is good to know.  Thanks.  And thanks for opening up even more of the site and Wikipedia to me.  I tend to enjoy one facet of a site so much that I will stay there and not move around as much as I should. 

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#4) On December 13, 2008 at 11:52 AM, Entrepreneur58 (36.37) wrote:

I would just add that shorting stocks is not a good idea for novices.  If you are wrong, your losses are not limited since there is no limit to how much a stock can go up.  Also, short sellers are frequently "squeezed" and forced to buy back the stock at sky high prices.  Furthermore, stocks in the long run tend to go up due to inflation and economic growth, so unless you really have information that a company is in big trouble that most market participants don't have, you are likely to lose your money by selling short.  Good luck.

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#5) On December 13, 2008 at 1:26 PM, Mary953 (74.99) wrote:

Ouch!!!!  Somehow I don't think that information is adequately stressed in Wikipedia.  I know enough to steer clear of commodities for just that reason.  Thanks for the clarification.  This type of advice is the reason that my interest is usually more centered here rather than FAQ. 

And once in a while, there is a question that a reference librarian can answer (any topic).  Those times I get to help in return.  I hope you will allow me to be of help if you ever have a curious sort of question.  I cannot exactly put a bow on that gift or even figure out how to wrap it, but as a Christmas present, it is the best I can offer in return!

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#6) On December 13, 2008 at 7:28 PM, anchak (99.85) wrote:

Thank god! Entrepreneur58 brought up the point.

Shorting stocks is not for novices. It has unlimited theoretical downside risk.  Obvious since there is upper bound to a price of a stock while there is a lower bound of zero.

Options ARE WAY MORE COMPLICATED. Buying Puts is possibly the way to go. However 2 upsides:

(a) Limited loss - you cannot loose more than your orginal investment.
(b) If you are right they provide great return potential due to inherent leverage.

SOUNDS TOO GOOD TO BE TRUE! It is.... You not only have to be

(i) Right about the direction of the stock
(ii) You have to pick the right timeframe ( expiration date) , by which to be right - THIS IS THE TOUGHEST PIECE
(iii) You pay a premium to the guy on the other side - called the Option Writer for the priviledge of being right in the RIGHT TIME. After the time - the VALUE WILL GO TO ZERO - infact the value of an option decays ( ie goes down) everyday due this TIME effect , irrespective.

The only way you employ option ( and I am only saying this because of the environment today) is do some serious Math spreadsheet to compute an Worst-Case Scenario loss on your investments, figure out a chance ( probability) of that happening and see what insurance you need to cover that risk. Then you assume the Option is that insurance and invest with the assumption of ZERO return.

VERY VERY RISKY. Let me say that again - VERY VERY RISKY.

ALTERNATIVE
===============

Short and Ultrashort ETFs.....these essentially short the various indices/sectors of the market. You are long ( ie you buy them just like a stock) - so you do not have unlimited downside. And  they are the hedge against downtrends in the market.

ISSUES

(1) Overloved, overtraded: Especially the "leveraged" ie 2X, 3X and go knows what ?xs they'll come up with. Basically, due to supply/demand - these are heavily departing from their underlying indices and their more "stodgy" 1x counterparts

(2) They short the indexes: which means you end up shorting typically the well-known and "comparatively" better companies. Thus if you have a portfolio of TECH stocks: say like Google, Apple, SIGMA Designs, Perfecient, Synaptics, ISRG and Rofin-Sinar - and you want to hedge with an inverse ETF (which could be QID)- well the first 2 are part of the indices , while the smaller names may not - I am unsure - they may very well be, for QID. But I know most of the others are not in NASDAQ100.

Anyway...you portfolio has in this case higher volatility ( typically true for a bunch of individual stocks) than the borader index. Hence just an index short may not be enough - which is the reason why people flock to the 2x ( like QID) - and then if the market HAS A BIG UP MOVE - JETTISON OUT like crazy.

Sometimes it makes my stomach churn when people throw out "Shorting" ideas so loosely! One of the best shorters on the Fool is Everydayinvestor - he makes his living shorting "worthless" stocks - yet his advice for general investors is to stay away from it.

Times are tough - so if you see more downside - you can pursue this. But you really need to know what you are doing!

  

 

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#7) On December 13, 2008 at 7:30 PM, anchak (99.85) wrote:

I meant to say

"Obvious since there is (NO) upper bound to a price of a stock while there is a lower bound of zero."

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#8) On December 13, 2008 at 9:40 PM, Option1307 (29.82) wrote:

I like etf's for shorting, they are "Easy" in th fact that you don' have to choose a time frame per se. This is the easiest way to short the market in my opinion. Options and puts require a lot more work, knowledge, etc. I agree with most here, stay away from them until you get more experience. ETF's are hard as well because of their fundamental problems, but are the relatively wasy way to short the market.

I'm a rookie as well in terms of actual/active investing, yet I've done great this year with "short market" etf's. It is possible, just be aware of the risks. good luck.

I truely appreciate your honest questions, they make us all learn.

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#9) On December 13, 2008 at 11:05 PM, Mary953 (74.99) wrote:

I have often thought that if I had been an apostle, I would have been Thomas.  Eleven guys standing there in sandals, nodding their heads like they understood and one guy with his hand up,

"Wait!  You want us to go where?  And we get there how? Okay, and then what?"

Maybe Jesus would have been sighing at the end, but all twelve would have known where they were going.  (Maybe it is just my directionally-challenged mind at work here)

anchak -

Trust me.  If there is something that makes your stomach churn at the idea of the inexperienced dealing with it, then I don't need to try it with real, worked-for-it money.  Also, if you had to clarify which side of that sentence needed the (NO) part added, then I am in over my head.  There are times when you need more than "Just the FAQ's"  and I usually ask at those times. Okay, lousy pun, worse than lousy, I'm sorry, really, really sorry!     ; )

Option1307

Thanks for the last bit.  I actually do feel a bit silly sometimes asking these questions, but the truth is that you guys break it down into real world terms.  It is much easier to understand and to break out the bits I am not certain of.

Right now, I am certain that I do not have the nerve or the years till retirement left to learn and implement (and recover from using) the shorting technique.  I am grateful for all the help though.

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#10) On December 14, 2008 at 12:10 AM, gman444 (28.78) wrote:

Mary953:  You are proving to be a delightful presence---and adding great life to this community.   It is great to have you here, and I have added you as one of my favorites. 

At your level of experience, the best way to get on the short side of the market is through the ETF's.  You do not have the disadvantage of "decaying assets" as you do with options (puts), and there are just too many obstacles for you to think about shorting stocks. 

One thing to be careful of with the reverse ETF's is that many of them are new, do not have a track record, and most importantly, don't do what they say they are supposed to do.  You have to know what is in the ETF in question, how much option trading and leverage they use, etc. 

If you find an ETF or reverse ETF you think is good, your best bet is to run a post for a discussion on it---there are many knowledgable Fools who will tell you what they know, which is often a great deal.  This is much better than listening to some broker who has a vested interest in what you put your money into. Good luck, and keep posting.....

 Oh, and I like Thomas too--there are a lot worse ways to go, especially in the financial world.  And he sure did know the real thing when he finally did see it for himself, didn't he?

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#11) On December 14, 2008 at 2:59 AM, Mary953 (74.99) wrote:

Thanks for the kind words gman.  You have been a help on more than one occasion and I enjoy your comments even when I do not initiate the post.

In this instance, if Thomas (or I) had any sense, and he at least did have a great deal, the answer would be - you are in over your head --STOP!! 

Just because it is possible to do something doesn't mean that you should do it.  This strikes me as a something that I should let pass by undone.  I have been troubled this evening by nuf2bdangrous' post detailing six cases of people or couples who have lived a life morgaging their tomorrows for more goodies today.  In each case, the todays are catching up with them and it breaks my heart to think of them having done that to themselves.  To know that nuf2 is going to work each day and dealing with people (he doesn't sound like he sees them as "cases") like this must be terribly difficult.  I would not use my home as collateral for another home, or pull home equity for another piece of land but I could work my way into trouble very easily "playing at investing".It would be less investing and more gambling if I did not have a very careful grasp of what I was doing.

One thing that I am very certain of:  the very knowledgable Fools are definitely a great deal better to talk to about any investing than a broker.  Mine deals in a set group of instruments which is fine if I want him to take care of everything for me.  If I want to tackle things on my own, I am just that - on my own.  And then it really helps to have friends.

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#12) On December 14, 2008 at 10:47 PM, gman444 (28.78) wrote:

It seems you are both wise and compassionate, Mary, a rare combination these days.  It is a surprising and good feeling to know that my comments have been of help---I have thought of myself as pretty anonymous in the CAPS community, and most who post regularly know far more about the financial world than do I.

One thing I do know is that we are seeing history unfolding in front of our eyes and in our lives, and the balance of power in the world is in the process of shifting.  It is indeed good to be able to share views with friends, and to learn as we do so....

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#13) On December 15, 2008 at 12:18 AM, Mary953 (74.99) wrote:

Gman, your comments are of special help tonight.  Young friends are caught in this financial whirlpool.  Their problem stems from having a livelyhood with management that cuts first at employees' salaries and benefits. They live frugally but will be hard pressed to retain what they have built.

I am deciding that the greatest riches to be found at present are in close family and friends.  To have others that you can rely on, whether anonymously in a blog (where I do enjoy seeing your name) or close by to hold fast to, these are the treasures to be counted.  Perhaps my sadness tonight is knowing that a family that I thought safe is still in danger.  Something can be done.  What that something is, well, that remains to be discovered, doesn't it? 

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