Support our online development, and advance our onground research initiatives in free market economics, as we seek to showcase the brightest Next-Gen minds.
THE ME-P DISCLAIMER: Posts, comments and opinions do not necessarily represent iMBA, Inc., but become our property after submission. Copyright © 2006 to-date. iMBA, Inc allows colleges, universities, medical and financial professionals and related clinics, hospitals and non-profit healthcare organizations to distribute our proprietary essays, photos, videos, audios and other documents; etc. However, please review copyright and usage information for each individual asset before submission to us, and/or placement on your publication or web site. Attestation references, citations and/or back-links are required. All other assets are property of the individual copyright holder.
Money Making in Down Markets
[By Julia O’Neal; MA, CPA]
When a physician-investor buys a stock, he or she is said to be “long” the stock. “Shorting” is selling a stock a physician-investor does not own.
Investing or Betting?
Like buying a “put”, short selling is a bet that the stock will go down in price. The short seller sells a security he or she does not own, in anticipation of the price falling, and borrows the security to deliver to the buyer.
Covering-Up
When the short seller has to “cover” the borrowed stock, he or she will have to buy it. The short seller hopes to buy back the stock at a lower price to repay the loaned stock. If it must be bought back at a higher price, the short seller loses money.
Unlimited Loss Potential
Because there is no limit on how high the stock could go if the short seller is wrong, there is no limit on how much could be lost. (The physician-investor who is “long” a stock can lose only the entire cost of the stock.)
“Shorting Against the Box”
A physician-investor may sell a stock short simply because he or she believes it is going down, but may also “sell short against the box” to protect a long position. This is a strategy used particularly when income tax rates for long-term capital gains are lower than ordinary income or short-term capital gains.
For tax reasons, the physician-investor does not want to sell some stock that is owned.
However, he or she believes the stock is going down and wants to be protected. The physician-investor will profit from a short-term decline in value, but can still hold the security for a possible long-term gain.
The Short-Sale rule
Short sales can be made only after a plus tick (ticks are movements of 1/8 or more for listed stocks and can be increments as small as 1/64 for NASDAQ or OTC stocks) or a zero plus tick.
That means short sales can be made only after the stock has sold for either a higher price or the same price, but the last price difference was up. Ironically, the short interest theory holds that large short positions are bullish for a stock.
Assessment
Even though many physician-investors are obviously anticipating that the price will fall, the buying pressure (“short squeeze”) engendered by all of their need to buy the stock to cover their borrowing is expected to raise the price of the stock.
Conclusion
Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.
Link: http://feeds.feedburner.com/HealthcareFinancialsthePostForcxos
Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com
OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:
DICTIONARIES: http://www.springerpub.com/Search/marcinko
PHYSICIANS: www.MedicalBusinessAdvisors.com
PRACTICES: www.BusinessofMedicalPractice.com
HOSPITALS: http://www.crcpress.com/product/isbn/9781466558731
CLINICS: http://www.crcpress.com/product/isbn/9781439879900
BLOG: www.MedicalExecutivePost.com
FINANCE: Financial Planning for Physicians and Advisors
INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors
Share this:
Filed under: Investing |
The Leading Business Education Network for Doctors, Financial Advisors and Health Industry Consultants 
We’ve been using shorts at certain times for close to two years now; originally, with Rydex® funds, then ProFunds®, and now with ETF’s.
It’s been successful a few of the times and detrimental one time. You have to have a discipline on when to use it and when to get out of it. The double inverse has allowed us to hedge the long position with half the amount. On the cost side, you have to get your trading costs down. We battled with the custodians on no transaction fees on the funds because we knew we would, most likely, be in them for a very short period of time.
To be honest, you’ll never get a perfect hedge and you’ll really never get the perfect timing either. However, it does add value to your client’s portfolio simply because they are not dropping as fast or as far as the markets. Clients really can identify with the fact that YOU ARE DOING SOMETHING rather than just riding the market down. Your other options are to sell out a portion and sit in cash or rotate the allocations to more conservative positions (less stock, more bonds).
-Anonymous Financial Advisor
LikeLike
Short selling
Short sales allow you to play the downside of a company. Investors using this strategy reverse the order of the traditional stock transaction, selling first and buying later. Because all transactions must be resolved eventually, your portfolio will be “short” a given equity until you buy back to “cover” — hopefully at a lower price, creating a profit.
This is a deceptively simple form of trading, and the risks are significant.
For starters, short sales can be made only from a margin account that requires you to have a certain amount of cash in reserve to cover any trades. After all, no broker would let you just “sell” as many stocks as you want without considering whether you could afford to eventually buy them back.
As long as you make good trades you’ll be fine, but if you find yourself on the wrong side of a short sale, you might be faced with the dreaded “margin call,” where a broker requires that you either close the trade or front more money.
These events typically come at the worst time, since you are already in a bad spot on a poor investment — and the broker is asking for cash you may not have. Do you sell just to get out, or do you scrape together the cash and hope for a rebound?
Another troublesome feature of short selling is that because you sell first, you have theoretically unlimited losses. For instance, if you buy a stock at $10, the worst it can do is go to zero and give you a 100% loss. But if you sell at $10, it could go to $20 and you’d lose 100%, or it could go to $21, or $31 or $131! It’s rare, but it happens.
Still, if you have the discipline and research to effectively short stocks, it can be a powerful tool. Most major brokers offer a way to sell short, but read the fine print on fees and margins, because pricing will differ and could result in charges above and beyond a plain ol’ equities account.
Duke
LikeLike