On July 26, 2013, Stuart Pfeifer writes in the Los Angeles Times:
Short-selling a company’s stock is a risky proposition even for Wall Street professionals. It is not for the fainthearted.
Investors short a company’s stock by borrowing shares, putting cash or assets down as collateral. Then they quickly sell the stock, essentially trading shares they don’t own.
If the stock price falls, they can buy the shares at the lower price and return them to the lender, making a profit. If the stock price rises, short-sellers have two choices: Wait it out or buy at the higher price and lose money.
In order to wait it out, short-sellers whose investments are in the red must have enough collateral on hand to cover their losses.
They also must pay other fees and charges, including a stock’s dividend payments. Ackman, for instance, has to pay Herbalife’s regular quarterly dividend of 30 cents a share on the stock he shorted — a total of about $12 million for the first two quarters this year.
“The thing about a short position is there’s no limit to how much you can lose,” said Jonathan Berk, a finance professor at Stanford University‘s Graduate School of Business.
“When you buy a stock, the most you can lose is the price you paid for it,” Berk said. “Usually people with short positions will have some rule: If it gets to a certain position, they get out.”
This is about savings-based stock market gambling.
More accurately this is not about investment and profit but instead SPECULATION and CAPITAL GAIN. But the media continues to framed the term as investment and investors instead of speculation and speculators when related to the stock exchanges.
Stock purchased from a company and in which the company receives the (typically past savings) money from the purchase in order to produce things is a TRUE INVESTMENT.
The stock market operates on the secondary level whereby stock is purchased from another stockholder who receives the cash from the transaction, which when held for sale at a future time is speculation.
In the first case the stock becomes speculative as soon as that buyer decides to hold it for appreciation but it is important to understand that the money received by the producer company is used to build new asset activity or replace old assets.
In the case of speculative stock buying and selling, this activity does not provide gain to the producer company (even if the price of the stock offered initially (issued and sold) goes up, but instead enriches the holder of the asset (stock). Of course, if the producer company decides to later issue new stock the company owners will receive more money per share of stock issued.
Speculators do not add to economic activity, at least primarily. Perhaps members of society will feel more optimistic with the stock shares (market) going up, and perhaps they will be looser with their savings to purchase products and services. Unless, however, the producer company has new cash to build products and extend services in demand, then speculation will not help. Eventually, the speculators might sell their stock or other asset and use some of that to purchase consumer items, but that is a tenuous trail to economic progress and again it does not assure the producer company having the cash to actually build more things.
Of course, if the money from these sources were sitting in the bank, the producer company could borrow money needed for new production.
What is needed is to implement the Capital Homestead Act.
Right now the Federal Reserve creates money by loaning it to banks, who re-loan it multiple times because of fractional banking rules. With Capital Homesteading, money would be created by loaning it directly to citizens via banks at near-zero interest to invest in FUTURE wealth-creating, income-generating (full dividend payout) productive capital assets formed by producer companies. To build real wealth and also phase out our near-defunct social security scheme, the new full-reserve money would go into a long-term retirement account to be invested in dividend-paying, asset-backed shares of corporations. That way, money power would be spread to all citizens. The middle class would be invigorated using the principle of compounding interest, instead of being decimated by mushrooming public and personal debt.
The Federal Reserve could play a more positive role, removing artificial barriers to equal citizen access to acquiring and owning productive capital wealth. By creating asset-backed money for production, supported by growth-oriented tax policies, the Federal Reserve could truly help promote shared prosperity in a market system.
Support the Agenda of The Just Third Way Movement at http://foreconomicjustice.org/?p=5797
Support Monetary Justice at http://capitalhomestead.org/page/monetary-justice
Support the Capital Homestead Act at http://www.cesj.org/homestead/index.htm and http://www.cesj.org/homestead/summary-cha.htm
As an alternative that would result in financing to create real productive capital asset formation and grow the American economy, see “Financing Economic Growth With ‘FUTURE SAVINGS’: Solutions To Protect America From Economic Decline” at NationOfChange.org http://www.nationofchange.org/financing-future-economic-growth-future-savings-solutions-protect-america-economic-decline-137450624
http://www.latimes.com/business/la-fi-herbalife-ackman-20130727,0,4484066.story
