Can I short a stock again and again?
If I know a publicly traded company is going bankrupt with 100% certainty, can I use the following method to maximize my profits from knowing said information? And if so, is there already a term for this?
Let’s say I have $100 in cash and “AIG” is trading at $100/share. Let’s also assume I know that starting today, the stock will drop approximately 50% a day until in effect it trades at $0. (At the end of today it’ll trade at 50$, at the end tomorrow at $25, etc).
So this is the strategy I would employ in this scenario: I short 1 share today, cover at the start of tomorrow, and make a profit of 50%. Now I have $150, and with that, I short AIG again, planning on doing this again and again. In effect, I am getting returns of 150% a day until AIG finally ceases trading. If I have 7 days before AIG goes bankrupt, I effectively make 1.5^7= 17 times my original investment. This beats just shorting AIG once, because the maximum profit one can obtain from that is $100.
This all occurs in an ideal world where I alone have this privileged information and there are no transaction fees. Would this work in theory? I’m afraid I may have faulty logic somewhere along the line.
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about 1 year ago
theoretically your idea is correct and you can short sell the shares again and again , of the company of your choice.
in general we all do these speculative actions in name of share trading.
but in practice you have to be aware of the rules and regulations at THAT TIME for trading allowed by the stock exchange under which that company is listed or permitted for trading.
further please note in speculation,it happens opposite to speculated . trading carefully with safety is must in this risky job.
about 1 year ago
The flaw in your logic is the uptick rule. You have to enter your short on an uptick in the stock. That can quickly cause one share purchases to become unreliable and uneconomic. (You can’t just not account for commissions.)
Stocks don’t generally fall in lockstep either. There can be days of plummet, advance and then falling again.
You also have to be aware of insider trading information. If you ‘know’ many others know as well. And the short-interest will skyrocket making it difficult if not impossible to borrow the shares to short. Any information that you trade on that is insider will get you in a heap of trouble with the SEC.
I’m not suggesting that you can’t make money shorting. You can. But the plan that you laid out is theory at best. Most stocks don’t trade this way and bk’s don’t work this way at all….
about 1 year ago
Based on your logic and the wording of your question you have no idea how the markets work nor the rules governing the market.
Yes you can short stock as often as you want as long as you put up th money to do so.
Your logic is not based on any factual events that ocur in the market nor does it consider any rules, regulations or policies of the market
1- Your will need to have more than $100 to open an account, with any B/D and a lot more to do any type of short selling.
2- If you sell short on day one, you are required to have in your account at least 50% of the market value of your short sale.
3-The commissions on a round trip $50 trades must be factored in your logic, even with no transaction fees, you will incur expenses for the trades unless you are doing something illegal or being a participate in illegal activity
4-Most B/D will require you to establish a margin account for daily shorting, this will require to have minimum equity in your account of at least $2,000
5-When the stock value falles below $5, the B/D will require to deposit 100% of the market value and you will not be able to use the proceeds of the previous trade to cover your requirement.
6-The firm may not be able to borrow and/or lende only 1 share of stock for shorting, if so you will not be able to sell short
7-The only way you will be able to enter these transactions with out incuring and cost is if you illegally make enters to the B/D (or clearing Co.) books, but you will not be able to do both.
8-If you alone “have priviledged information, then you are trading on insiuder information and will be in violation of Federal Law.