From an investor fear and contagion perspective I would think the high P/E stocks will get hit harder.
OTOH, from a practical business going forward perspective, entities that buy lots of parts and materials from tariffed nations (IOW manufacturers) will be hit harder than a tech firm that only really consumes electricity & labor.
OTGH, in an economy dominated by consumer spending, the companies most exposed to consumer behavior will be the ones hammered when consumer sentiment turns from happy to terrified. Outfits like Google will find their ad revenue collapsing if consumers quit buying. Retailers like Wal*Mart will get hammered too.
So there you have it: one guy, one opinion, plus two “on the other hands …”
I don’t understand shorting stock. Let’s say that you think a certain stock will lose value. So you buy it for $100/share. Then the price drops to $80/share. How do you make money when you lose $20?
If the contract says you have to sell it at $90 a share, you buy at $80, sell it to the other party for $90 and make $10 a share.
Shorting and such are contracts to buy/sell stock with someone else at some price at a set point in the future. The price at the day the contract is made is irrelevant.
Nope. You’re describing an option. Which come in two flavors, “put” & “call” which are opposite in function. The details are irrelevant here, but both contain the idea of making a deal now at one price to buy or sell at a specific later date for a specific different price.
Shorting is much more loosey goosy.
Shorting is where you pay a small fee to borrow a share you do not own then immediately sell it at today’s price. Then hope the price goes down on some unknown future date to some unknown future price so you can buy a replacement share for less than you sold the borrowed share for. Then you return the replacement share to whoever you borrowed it from, pocketing the difference. e.g. Borrow at $100, immediately sell at $100, replace days or weeks later at $90, make $10. There are borrowing charges, so it’s not quite that simple and the longer you’re in the borrowing state, the more that charge will eat into your eventual profit.
The whole time you’re in the borrowing state you’re watching the price and trying to decide if now is low enough to buy back, or will it go lower tomorrow? And what if it starts climbing back up towards your original borrow price? Or surpasses that price? Shorting is nervous work. Options are more complicated instruments, but the worry is simpler.
The risk to shorting is that you have to rebuy those shares you borrowed, so if the stock gains value instead of losing it, your liability is potentially unlimited. If I short Tesla at $260, and it shoots back up to $400, then I have to buy it at $400 and I’ve lost $140 per share. Or, unlikely, if it went to $1500, I’d have to buy it and lose $1240 a share, several times my original purchase (or loan rather). With regular ownership you can only lose as much as you invest. Of course you can limit that with stop loss orders. But otherwise it’s basically just like owning a regular stock in reverse, you’re predicting it will decline over time instead of grow. I’m not particularly nervous about it – if it fails it’s not that much different than if I buy a regular stock and it declines.
That said, I’m not sure how much I’m paying in interest/fees for borrowing it. I’m sure it’s somewhere in the fidelity literature but they’re not giving me a rundown on the stats anywhere that I can see.
I actually got an offer from them a couple of weeks ago – they asked me if I wanted to lend one of my high demand stocks sometime for a 9% interest rate. They’re basically taking my share and letting a short seller borrow it and paying me interest to let me do it. I still own the stock, so any price movement ultimately benefits me and I can sell out of that at any time (I guess they grab the stock on loan from someone else if I do). Pretty much free money. But I’m not sure how much I’m borrowing to short TSLA. If I’m paying 9% interest on that, I’m unclear if it’s coming out of my account balance or it’s priced in when I sell or what. The actual percentage varies depending on the supply/demand for the loaned stock, I’m guessing 9% is rather high for an in-demand stock.
There’s a feature in Fidelity to enable them to loan out your stocks to short sellers. You probably make like 0.001% on your total holdings by having it. If you hold $100k, you might make $100 in a year. So, not anything really worth talking about but it is (the equivalent of) a free box of tea every once in a while.
The more interesting thing is that Fidelity shows you which stocks are being shorted, and that gives you some sense of the popular sentiment on your holdings.
Options I’m just now starting to get the hang of. They’re essentially a bet with someone else (whoever chooses to pick up the contract) about the future price of the stock. You pick an expiration date and a strike price – you’re essentially saying something like “I think TSLA will be $200 (or lower) by May 1, anyone else want to take the other side of that bet?” In a put, you’re the one offering to pay the person who owns the share a fee (premium) if they take that bet. So someone may say “Okay, I think Tesla will stay above $200 until May 1, so I’ll take that bet. But you need to pay me $5 per share for the risk I’m taking (premium).”
If Tesla stays above $200, nothing happens, and the owner of the Tesla stock banks the $5 per share. If Tesla goes below $200, the buyer of the put gets the option to exercise the contract, and the owner has to give him his Tesla stock for whatever for the $200 price. Now because he’s paying a premium of $5 to the owner for taking that bet, he actually breaks even at $195 – $200-5. In order to actually make a profit, it has to come under $195. So if Tesla reaches $180 on any day before May 1, the buying the put executes it and makes $15 per share ($205-20). Or they can wait and see if it goes lower. The buyer can execute at any time before the expiration date.
There are people who are willing to sell puts and people willing to buy puts, so the price for the contract (premium) is always going up and down based on news and how the stock is doing. So for example I made a put on Tesla at $245 at a $5.10 premium for Marc 21. I need it to reach $239.90 by then to break even. But because Tesla is lower than when I bought it, buying that same contract now would cost $11.50 per share since it’s now more likely to hit.
Contract price tends to go up the further out the expiration date is (because there’s more uncertainty and more time that something could happen to make the contract executable) and down the lower your strike price (because it’s less likely to hit it). So for example if I wanted to bet that Google stock will lose half its value in 2 months, someone will probably sell me that contract for like 5 cents a share because it’s so unlikely that it just seems like free money to them. But if you were to do something that seems pretty likely to happen – say you bet Tesla will go down 5% in the next 3 months – the contract cost is going to be very high, maybe like $30 or $40 per share, making it not worth it.
In order for you to be able to short a stock, someone has to buy it (to loan out to others). Buying it forces the price up. Once enough people have driven up the price with a goal to short it, and new orders aren’t coming in, the price falls. Once it has fallen enough - which still seeming far too high to make any sense as a true value for the company - people will start buying to short again and drive the price up.
You’re effectively part of what is keeping the price high and giving Musk the ability to do things like swing a few billion around to buy things.
My sense would be that there’s probably a pack of people who are, in essence, swapping money back and forth between themselves moving TSLA like a saw blade pattern. At the point they all get bored of active trading, the price will crash.
By all means, you could make good money in that activity. But it is still playing with fire and it probably does have negative repercussions for society.
So I actually mentioned in my post that I got the offer to loan out my stocks at 9%. If the shares are consistently loaned out, it’s actually a pretty fairly significant payout. I own $60k in the stock it wanted and it’s paying me 9% (annualized) so if it were to stay loaned out that’s actually $450 per month in interest.
That said, I have no idea what fraction of time I can expect it to be loaned out. I got loaned out 4 days ago and today it was returned to me.
What I was saying is that for the stocks I’m shorting, rather than lending, I’m not sure what interest rate I’m paying or how to find that out. I should do some more reading to figure that out, but I’ve been too busy doing crazy shit with my money that I barely understand to do silly stuff like figure out how it all works.
In general, things rarely stay shorted for more than a few days.
I would have to assume that the reason they offer you 9% and yet only give me 0.001% is because those are - in essence - the same number. Each loan probably is being loaned out at something like 9% for those few days but, since most stocks aren’t being loaned out at any moment or even ever at all, across your entire portfolio over all time it probably amounts to the 0.001%.
As said, though, the interesting thing for you is that it means someone thinks that your stock is going to crash.
I’m not sure I follow your logic here. Lots of people already own Tesla stock because they expect it to grow. Why not, in that case, loan it out for a little bit of interest? No one needs to buy new stock from TSLA to cover every short, there are plenty of stocks out there. Loaning them out for a short doesn’t seem like that would have an upward driving force on the price.
What you’re describing can happen in a short squeeze but that’s an unusual case where the ratio of shorted stock and normal stock is unusually high, not the normal operation of the stock price.
Tesla is kind of an irrational stock but I would guess that in general shorting a stock tends to move the stock more downward than upward in most circumstances simply because it might erode confidence in the stock if anyone looks at the stats and wonders why so many people feel like they should short it.
I don’t know enough about trading, and I may be missing something, but I think it’s the true believers that are making TSLA an irrational stock, not the short sellers. This concerns me because I do want to be ethical with my money, and my impression is that I’m hurting TSLA by doing this, not helping them. Or at least neutral.
Remember that huge quantities of TSLA are owned by various funds, some of which are massive. I have TSLA through my S&P 500 index fund, but not individually.
That is certainly the standard line. And factually accurate as far as it goes.
But it’s not an argument I’ve ever agreed with because it requires a very farfetched amount of abject stupidity to get into.
Yes, your losses are theoretically unlimited. But if you did borrow at e.g. 260, how fast can it get to 400, or 1400, or 14,000? Penny stocks can jump 100% in a day. Real world companies, not so much.
If anyone takes a short position then goes on a 3 week vacation in the Darien, well … they may get what they asked for: a beating. But in the modern era, it is really pretty unlikely anyone would sit still while their short position goes into losing territory by anything even approaching 100%. Much less 1000 or 10,000%. Which are the standard scare numbers crowing about “potentially infinite losses”.
Just like somebody with a long position, and paying attention, is very unlikely to hold their shares while the price grinds all the way down to 10% of their basis (90% loss), or 1% of basis (99% loss). Somewhere along the way they will cut their losses and run, long before their losses hit the theoretical max of 100% of their investment (plus gains).
I’m not sure of the real numbers but there’s probably the following categories of people who do hold or have held TSLA:
People who bought it during a mania of EV optimism, and are probably very happy to sell for fear of the floor falling out. Given the spike after Trump won, I’d expect that they largely cashed out.
Index/theme funds that hold it because the formulas that decide the index mandate holding it.
Short sellers and other folk who are trying to get clever with buying and selling to be the last person holding the fish before someone complains about the stink.
MAGA believers
Now, you’re theorizing that group 4 is the largest. But you can drive up the price of a stock just buying percentages of a share, if you’re not concerned about true valuation. Raising the price of the stock by double could happen, just through trying to buy 0.0001% of the ownership. It’s not guaranteed that there’s really that much ownership among MAGAs - they’re mostly not the investing type and, to the extent that they are, they’ve been dumping a lot of money into MAGA for 8 years now and probably don’t have so much to spare.
I’d venture to guess that most of the ownership is through index funds and most of the price movement comes through group 3. Maybe group 4 did create the boost after the election…but even that could have been group 3, if they started pre-gaming to “get” the MAGAs - when there may have not been any or very few MAGAs actually involved. That could just as easily have been a short squeeze.
I don’t short stocks, and I don’t have a margin account. But isn’t a margin account needed in order to take a short position? If so, at some point I think there would be a margin call in order to cover your short. Do I have that right?
Yes, that’s correct. The details vary by where you keep your account.
But in general, the brokerage wants to be sure you can somehow cover your position using money they can see and/or sequester. Claiming you’ve got plenty more hidden in your mattress won’t impress them even a little bit.
As always, where folks can hurt themselves with investing is becoming convinced that [whatever transaction] is a 1-way bet and they go all in on it. Then when it moves against them they either cannot bring themselves to admit they are wrong, or have no money with which to cover the rest of it. So it eats them alive.
I’ve been similar. A few whiffs a few grand slams. Overall roughly been doing on pace with the 500.
I’m a long term hold person for my individual picks. Mostly contrarian mindset buying ones not currently hot but that make sense long term. I try to not watch too closely. Just bought some Pfizer last week as an example. Did very well these last years with Trane, Eaton, Mastec, Southern Copper … OTOH ATT is only recently coming back up and my clean energy etf has been dud to date.
My MIL does a lot of active in out trading and has done well. I sit.
Rationally sticking to the indices makes more sense even when I am beating them, just because of the diversity. But as long as I don’t lose too much more than they do this is more fun for the smallish bit.
Don’t you incur a significant capital gains hit if you sell off all your stocks?
I’m not sure what’s “gimmicky” about DCA. It’s just a simple investment strategy using basic math. it only really works if you invest consistently over long term.
I’m hearing a lot of investment decision-making in this thread based on emotion and conjecture, with some caveats of “not knowing much about xyz”. So it makes me a bit hesitant to make any dramatic moves as I don’t want to over react (but I don’t want to under react either).
Unfortunately what Trump has managed to do is create a lot of fear and uncertainty in the marketplace with what appears to be crazy policies. Maybe it is part of some grand negotiation strategy to create a ton of chaos in order to create a favorable outcome.
Or it will all blow up in his face and everyone is fucked. Can’t say.
Really what I’m trying to figure out is if February is a down month or start of a long-term downward trend. The last thing you want to do is panic and sell off all your shit right before Trump makes the NASDAQ great again!
Perhaps I’ll review my investments over the weekend.
