Online article how shortest work28 Jan 2019 17:51
Look at Conseco's ( CNC) current campaign against the short-sellers who are betting that the insurance company's stock will continue to fall. The company has publicly said it thinks short-sellers and others have been spreading false information about the company's debt financing. Meanwhile, Conseco shareholder Irwin Jacobs is taking on the shorts in advertisements urging other stockholders to forbid brokers from lending their shares to the shorts.
Short-sellers can indeed have a negative impact on a stock. Some short-sellers do disseminate negative information about companies over the Internet or elsewhere. Just read the message boards out there. But others are just trying to do what every investor wants to do: make money. They just take the mantra, buy low and sell high, and reverse it, sell high and buy low.
A rising amount of short interest in a stock can send the message to other investors that some people think a stock is overvalued or that something is wrong with the company.
"It's almost a self-fulfilling prophecy," says one fund manager. Investors who are long a stock as well as potential buyers get nervous when they see the shorts going after a stock. These tacit admonitions can push shareholders to sell and dissuade other investors from buying, sending a stock's price lower.
If the price of a stock that's heavily shorted starts to rise, you can see the opposite happen. Numerous short-sellers can be forced to start buying shares to cover their positions, which can drive the stock price higher and higher.
A couple of events can cause this so-called short squeeze.
When you short a stock, you have to borrow shares from someone who actually owns them. A brokerage firm acts as the middleman in the exchange, but ultimately the shares must be returned to the rightful owner.
When the stockholder wants those shares back, the short-seller might be forced to go into the market and buy them in order to return them to their owner.
In many cases, the brokerage firm, as the intermediary, will be able to find more shares to loan the short-seller, who won't have to repurchase the shares. But if a stock is hard to borrow, such as a new or thinly traded issue, the short-seller might be forced to go into the market and buy those shares. (If the short is dillydallying, the broker can buy the shares directly to return to the shareholder and pass on the cost to the short-seller.)
More buying creates additional demand for the stock, which can cause its price to go higher.
Conseco shareholder Irwin Jacobs is pushing for just this sort of squeeze.
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