Wednesday, July 08, 2009

GE Stock

Interesting article on why GE's stock has taken such a beating in the last year.


stan langerhaus said...

R, good post, i happened to see that interview. GE is presently trading around $10. Looks like an adventurous person might try to short it. But not me.

Ralph said...

Even though it has been explained to me on several occasions, I still don't exactly understand how the short game works. Yes, I realize that you are basically betting on a stock's price to drop, but I forget the nuances of how that all works... Enlighten me please, if you can and/or feel like it.

stan langerhaus said...

Since i am being lazy tonight, here is an informative article i lifted from Motley Fool:

The Fool FAQ
Shorting Stocks
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The Fool FAQ

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Many times on the Fool boards I've seen references to `selling a stock short' or `taking a short position.' Will someone tell me plainly what shorting is?

An investor who sells stock short borrows shares from a brokerage house and sells them to another buyer. Proceeds from the sale go into the shorter's account. He must buy those shares back (cover) at some point in time and return them to the lender.

Thus, if you sell short 1000 shares of Gardner's Gondolas at $20 a share, your account gets credited with $20,000. If the boats start sinking---since David Gardner, founder and CEO of VENI, knows nothing about their design---and the stock follows suit, tumbling to new lows, then you will start thinking about "covering" your short there for a very nice profit. Here's the record of transactions if the stock falls to $8.

Borrowed and Sold Short 1000 shares at $20: +$20,000

Bought back and returned 1000 shares at $8: -$8,000

Profit: + $12,000

But what happens if as the stock is falling, Tom Gardner, boatsmen extraordinaire, takes over the company at his brother's behest, and the holes and leaks are covered. As the stock begins to takes off, from $14 to $19 to $26 to $37, you finally decide that you'd better swallow hard and close out the transaction. You do so, buying back shares of TOMY (new ticker symbol) at $37.

Here's the record of transaction:

Borrowed and sold short 1000 shares at $20: +$20,000

Bought back and returned 1000 shares at $37: -$37,000

Loss: -$17,000

Ouch. So you see, in the second scenario, when I, your nemesis, took over the company, you lost $17,000...which you'll have to come up with. There's the have to be able to buy back the shares that you initially borrowed and sold. Whether the price is higher or lower, you're going to need to buy back the shares at some point in time.