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what is the shareholder value maximization myth | it is commonly understood that corporate directors and management have a duty to maximize shareholder value especially for publicly traded companies however legal rulings suggest that this commonly held belief is in fact a myth there is actually no legal duty to maximize profits while managing a corporation 1the idea can be traced in large part to the oversize effects of a single outdated and widely misunderstood ruling by the michigan supreme court in its 1919 decision in dodge v ford motor co which was about the legal duty of a controlling majority shareholder with respect to a minority shareholder and not about maximizing shareholder value legal and organizational scholars such as cornell university law professor lynn a stout and paris sciences po law school professor jean philippe rob who is a member of the bar in paris and new york have elaborated on this misconception 21 | |
what is a balance sheet | the term balance sheet refers to a financial statement that reports a company s assets liabilities and shareholder equity at a specific time balance sheets provide the basis for computing rates of return for investors and evaluating a company s capital structure in short the balance sheet is a financial statement that provides a snapshot of what a company owns and owes as well as the amount invested by shareholders balance sheets can be used with other important financial statements to conduct fundamental analyses or calculate financial ratios | |
what is a capital gain | capital gain refers to the increase in the value of a capital asset when it is sold put simply a capital gain occurs when you sell an asset for more than what you originally paid for it almost any type of asset you own is a capital asset this can include a type of investment like a stock bond or real estate or something purchased for personal use like furniture or a boat capital gains are realized when you sell an asset by subtracting the original purchase price from the sale price in certain circumstances the internal revenue service irs taxes individuals on capital gains | |
what s the difference between tangible and intangible assets | there are two types of asset categories tangible and intangible tangible assets are typically physical assets or property owned by a company such as computer equipment tangible assets are the main type of assets that companies use to produce their product and service intangible assets don t physically exist yet they have a monetary value since they represent potential revenue a type of intangible asset could be a copyright to a song the record company that owns the copyright would get paid a royalty each time the song is played there are various types of assets that could be considered tangible or intangible some of which are short term or long term assets the bottom linea company s shareholder value depends on strategic decisions made by its board of directors and senior management including the ability to make sound investments and generate a robust return on invested capital if this value is created particularly over the long term then the share price increases and the company can pay larger cash dividends to shareholders mergers in particular tend to cause a substantial increase in shareholder value shareholder value can become a hot button issue for corporations as the creation of wealth for shareholders does not always or equally translate to value for the corporation s employees or customers | |
what is shareholder value added sva | shareholder value added sva is a measure of the operating profits that a company has produced in excess of its funding costs or cost of capital the basic calculation is net operating profit after tax nopat minus the cost of capital which is based on the company s weighted average cost of capital | |
how shareholder value added sva works | some value investors use sva as a tool to judge the corporation s profitability and management efficacy this line of thinking runs congruent with value based management which assumes that the foremost consideration of a corporation should be to maximize economic value for its shareholders shareholder value is created when a company s profits exceed its costs but there is more than one way to calculate this net profit is a rough measure of shareholder value added but it does not take into account funding costs or the cost of capital shareholder value added sva shows the income that a company has earned in excess of its funding costs shareholder value added has a number of advantages the sva formula uses nopat which is based on operating profits and excludes the tax savings that result from the use of debt this removes the effect of financing decisions on profits and allows for an apples to apples comparison of companies regardless of their financing method nopat also excludes extraordinary items and is thus a more precise measure than the net profit of a company s ability to generate profits from its normal operations extraordinary items include restructuring costs and other one time expenses that may temporarily affect a company s profits formula for shareholder value added sva sva nopat cc where nopat net operating profit after tax cc cost of capital begin aligned text sva text nopat text cc textbf where text nopat text net operating profit after tax text cc text cost of capital end aligned sva nopat ccwhere nopat net operating profit after taxcc cost of capital shareholder value added in value investingthe popularity of sva reached a peak during the 1980s as corporate managers and boards of directors came under scrutiny for focusing on personal or company gains rather than focusing on shareholders sva is no longer held in such high regard by the investment community value investors who focus on sva are more concerned with generating short term returns above the market average than with longer term returns this trade off is implicit in the sva model which punishes companies for incurring capital costs in an attempt to expand business operations critics counter that these value investors are driving companies towards making shortsighted decisions rather than focusing on satisfying their customers in a sense investors who focus on sva are often actually looking for cash value added cva companies that generate a lot of cash through their operations can pay higher dividends or show greater short term profits this is only a proximate effect of actual productivity or wealth creation however real investments often require intense capital expenditures and short term losses this is especially true in the current digital age driven by innovation and heavy investment in technology and experimentation a new concept called blitz scaling could be viewed as the opposite of sva in that it does not give any attention to short term losses and all the attention to long term value creation stockholders always want their corporations to maximize returns pay dividends and show profits value investors can risk becoming shortsighted by focusing only on sva and not considering the long term implications of too little reinvestment limitations of shareholder value addeda prime disadvantage of shareholder value added is that it is difficult to calculate for privately held companies sva requires calculating the cost of capital including the cost of equity this is difficult for companies that are privately held | |
what is a shareholders agreement | a shareholders agreement also called a stockholders agreement is an arrangement among shareholders that describes how a company should be operated and outlines shareholders rights and obligations the agreement also includes information on the management of the company and privileges and protection of shareholders the basics of a shareholders agreementthe shareholders agreement is intended to ensure that shareholders are treated fairly and their rights are protected the agreement includes sections outlining the fair and legitimate pricing of shares particularly when sold it also allows shareholders to make decisions about what outside parties may become future shareholders and provides safeguards for minority positions a shareholders agreement includes a date often the number of shares issued a capitalization table that outlines shareholders and their percentage ownership any restrictions on transferring shares pre emptive rights for current shareholders to purchase shares to maintain ownership percentages for example in the event of a new issue and details on payments in the event of a company sale shareholder agreements differ from company bylaws bylaws work in conjunction with a company s articles of incorporation to form the legal backbone of the business and govern its operations a shareholder agreement on the other hand is optional this document is often by and for shareholders outlining certain rights and obligations it can be most helpful when a corporation has a small number of active shareholders example of a shareholders agreement for an entrepreneurial venturemany entrepreneurs creating startup companies will want to draft a shareholders agreement for initial parties this is to ensure clarification of what parties originally intended if disputes arise as the company matures and changes a written agreement can help resolve issues by serving as a reference point entrepreneurs may also want to include who can be a shareholder what happens if a shareholder no longer has the capacity to actively own their shares e g becomes disabled passes away resigns or is fired and who is eligible to be a board member as with all shareholder agreements an agreement for a startup will often include the following sections | |
what are shares | shares are units of ownership in a company the terms shares and stocks are often used interchangeably but they are technically different stock is the financial instrument a company issues and a share is a single instance of that financial instrument investopedia sydney saporitounderstanding shares | |
when establishing a corporation owners may choose to issue stock to raise capital companies then divide their stock into shares which are sold to investors these investors are generally investment banks or brokers that in turn sell the shares to other investors individually or through instruments like a mutual fund or exchange traded fund | shares are the equivalent of ownership in a corporation because they represent ownership not debt there is no legal obligation for the company to reimburse the shareholders if something happens to the business however some companies may distribute payments to shareholders through dividends others may elect not to do so preferring to put all revenues towards operation growth and securing the company s future | |
how shares are issued and regulated | generally a company s board of directors is given a specific number of shares that can be issued these are called authorized shares issued shares are the number of shares sold to shareholders and counted for ownership purposes so a corporation might have 10 million authorized shares but only issue 8 million because shareholders ownership is affected by the number of authorized shares shareholders may vote to limit that number as they see appropriate when shareholders want to increase the number of authorized shares they meet to discuss the issue and establish an agreement when they agree to increase or decrease the number of authorized shares a formal request is made to the state through filing articles of amendment the shares of publicly traded companies are listed on public exchanges generally through a process called an initial public offering ipo this is an expensive highly regulated and lengthy process in which a company goes through fund raising phases and scrutiny by regulators private company shares are generally issued through company stock options or as other incentives to certain employees these shares are still regulated but usually do not meet the securities and exchange commission s criteria to be listed on an exchange the issue and distribution of shares in public and private markets are regulated by the securities and exchange commission sec share trading on the secondary market is overseen by the sec and the financial industry regulatory authority finra 12types of sharesas mentioned any company can issue shares but publicly traded companies are more likely to divide their stock into two different types of shares many companies issue common stock which is divided into shares these are generally called common shares these provide the purchasers called shareholders with a residual claim on the company and its profits providing potential investment growth through both capital gains and dividends common shares also come with voting rights giving shareholders more control over the business these rights allow the shareholders of a company to vote on specific corporate actions elect members to the board of directors and approve issuing new securities or payment of dividends in addition common stock can include preemptive rights ensuring that shareholders may buy new shares and retain their percentage of ownership when the corporation issues new stock preferred stocks can also be divided into shares commonly called preferred shares compared to common shares preferred shares typically do not offer much market appreciation in value or voting rights in the corporation however this type of stock typically has set payment criteria like a dividend paid out regularly making the stock less risky than common stock because preferred stock takes priority over common stock if the business files for bankruptcy and is forced to repay its lenders preferred shareholders receive payment before common shareholders but after bondholders this priority treatment reduces the risk even further compared to common shares benefits of offering sharesif a company wanted it could issue it s equity as one simple ownership stake and not divide its equity offering there are obvious reasons why a company wouldn t want to do this here are some of the benefits of dividing its stock into individual pieces a company could technically issue only one share of stock there would be significant drawbacks to doing so fractional sharesfractional shares are portions of a single full share of a company s stock traditionally investors could only purchase whole shares but fractional shares allow investors to buy a slice of a stock based on a dollar amount rather than the number of shares for example if a stock trades at 1 000 per share an investor with only 100 to invest could purchase 0 1 shares of that stock the goal of fractional shares is to make it more accessible for a broader range of investors to buy and sell stock particularly those with limited capital however it s important to note that not all brokers offer fractional shares and there can be limitations on which stocks are available for fractional investing additionally while fractional shareholders typically have proportional rights to dividends they may not always have voting rights depending on the broker and the specific arrangement shares of stock and market capitalizationmarket capitalization is a measure of a company s total value in the stock market it s directly related to the number of shares of stock a company issues market capitalization is calculated by multiplying the total number of outstanding shares by the current price per share when a company issues more shares it increases the total number of outstanding shares if the share price remains constant this would lead to an increase in market capitalization if a company buys back its own shares reducing the number of outstanding shares and the share price remains the same the market cap would decrease let s look at an example a company s stock is trading at 50 the company has 100 000 outstanding shares of stock therefore the company s market capitalization is 5 million if the price of the stock goes up to 60 the company s market capitalization is now 6 million if the price stays at 60 and the company issues an additional 10 000 shares the company s 110 000 total outstanding shares have a market capitalization of 6 600 000 the reason this is important is because the value of a company isn t inherently in the price per share it is in the total number of shares multiplied by the stock price let s look at another example imagine company a and company b each with a stock price of 100 however company a has twice as many shares outstanding compared to company b this means it has twice the market capitalization i e it is twice as big even though the stock price is the same shares authorized vs issued vs outstandinglast let s touch on the different stages of shares at the beginning of the article we talked about the authorized number of shares the authorized number of shares is the maximum number of shares that a company is legally permitted to issue a company can have a different amount of shares issued shares issued refers to the total number of shares that a company has actually sold or distributed to shareholders this is always equal to or less than the number of authorized shares when a company first goes public through an initial public offering it issues a certain number of shares over time it may issue additional shares through secondary offerings or employee stock optionslast the company can have an even different number of shares outstanding shares outstanding represent the number of shares that are currently held by all shareholders this includes company insiders institutional investors and the general public this number is equal to the number of issued shares minus any shares held as treasury stock let s look at an example consider a technology startup at its founding the company set its authorized shares at 100 million in its charter as it grew and went public it issued 50 million shares through its ipo and subsequent offerings the company then repurchased 5 million shares that are now held as treasury stock the company has 100 million authorized shares 50 million issued shares and 45 million outstanding shares can you buy one share of stock yes you can buy one share of stock one share is typically the minimum number of shares you can buy at some brokerage firms that do not offer fractional shares | |
what s the difference between a share and a stock | a stock is an equity instrument issued by a corporation that represents ownership of that company a share is one unit of that ownership you would say i own 10 shares of apple stock for example | |
what is a stock split | a stock split occurs when a company divides its existing shares into multiple shares this increases the number of shares outstanding while proportionally decreasing the price per share for example in a 2 for 1 split each share becomes two shares each worth half the original price | |
how do you calculate earnings per share | earnings per share eps is calculated by dividing a company s net income by its number of outstanding shares it s a key metric for assessing a company s profitability on a per share basis a higher eps generally indicates higher profitability the bottom lineshares are units of stocks issued by a corporation that represent ownership they are sold to investors and traders to raise capital for the company many businesses issue stocks and shares when they need funds for research and development expansion or other growth opportunities | |
what is the sharing economy | the sharing economy is a peer to peer p2p economic model it facilitates acquiring providing or sharing access to goods and services sharing economies have existed throughout history but in modern times the sharing economy is experiencing a revival with the support of community based online platforms understanding the sharing economycommunities of people have shared assets for thousands of years in modern times the advent of the internet and its use of big data has made it easier for asset owners and those seeking to use those assets to find each other within their communities the modern sharing economy is also referred to as the share economy collaborative consumption collaborative economy or peer economy sharing economies allow individuals and groups to make money from their underused assets their free time or both in a sharing economy idle assets such as parked cars and spare bedrooms can be rented out short term in this way physical assets are shared as services a car sharing service like zipcar is an example of a sharing economy service zipcar participants can make use of daily or hourly car rentals with the vehicles parked close to their homes rather than at a traditional car rental agency rather than owning a private vehicle according to data from the brookings institute private vehicles went unused for 95 of their lifetime in 2017 the same report detailed airbnb s cost advantage over hotel space as homeowners made use of spare bedrooms airbnb rates were reported to be between 30 60 cheaper than hotel rates around the world 1 | |
how the sharing economy is evolving | the sharing economy has evolved over the past few years to encompass a wide range of online economic transactions that may even include business to business b2b interactions other platforms that have joined the sharing economy include in 2017 the brookings institute predicted that the sharing economy would grow from 14 billion in 2014 to a forecasted 335 billion by 2025 1 those numbers increased dramatically within a few years in 2022 allied market research valued the market value of the sharing economy at 387 1 billion and projected that it would reach 827 1 billion by 2032 2criticisms of the sharing economythe sharing economy can create more economic flexibility for participants allowing them to make extra money while at the same time decreasing the resources that each individual needs to own however there are criticisms of the way the sharing model has grown and changed over time criticism of the sharing economy often involves regulatory uncertainty many of the services offered on these platforms are intended to replace industries that are highly regulated by federal state or local authorities for example taxicabs and hotels individuals offering short term rental services may not be following government regulations or paying the fees this could allow them to charge lower prices it also opens the door to incompetent and even unscrupulous competitors the lack of government oversight can lead to a risk of serious abuses of buyers and sellers in the sharing economy such as a lack of privacy or the unfair treatment of contractors even when laws are in place to regulate sharing platforms those laws are not always followed for example in virginia multiple cities and counties claim that airbnb has avoided sharing the data necessary to determine whether it is paying the correct local and state taxes regulators are concerned that this lack of transparency is intended to hide information like units illegally operating as airbnb rentals 3there is also a concern that information shared on an online platform can create racial and gender bias among users this can happen when users are allowed to choose who they will share their homes or vehicles with or because of implicit statistical discrimination by algorithms 4the growth of many sharing economy services has led to a model that is organized less around sharing instead contractors use sharing platforms to create full time businesses becoming similar to the commercial services the sharing economy was initially meant to replace for example airbnb originally encouraged hosts to rent out unused rooms in their own houses or to rent out their houses when they were away from home as the popularity of the service grew however many airbnb units became full time private rentals this has led to concerns that rather than promoting the sharing economy airbnb has contributed to rising housing and rental costs as hosts buy properties to use solely as rental units this decreases the supply of both long term rental units and houses for sale 5the gift economythe gift economy in which participants do not charge each other money for the things they share or do has arisen in response to perceived failures in the sharing economy this model is organized around principles of community support and sustainable reuse examples of the gift economy include many public libraries also allow patrons to borrow children s toys tools home appliances and other shared items in addition to books and movies | |
how is the sharing economy more environmentally sustainable | the sharing economy is often cited as environmentally beneficial because it allows existing resources to be used more efficiently an uber driver sells rides to many people who otherwise would have to buy vehicles a co working space provides all of the equipment and space needed for a large number of home offices | |
what is the downside of the sharing economy | consider an alternate name for the sharing economy the gig economy some of its participants appreciate the freedom and flexibility that has been made feasible as the sharing economy has grown however this also allows businesses to shift away from hiring full time workers to hiring more contractors this decreases the number of jobs available that offer stable benefits such as regular pay health insurance sick leave and paid vacation time | |
how does the share economy differ from the conventional economy | the share economy has several distinct characteristics the bottom linethe sharing economy has enabled many people to live a life that is relatively independent and flexible while sharing their resources and talents with others like them it can allow participants to make extra money by pooling unused resources which decreases the resources that each individual needs to own however there are concerns and criticisms of the sharing economy most peer to peer participants rely on access to sophisticated trading platforms to connect and these platforms are backed by large businesses that take a big slice of the profits for themselves and may not follow government regulations as these models evolve many of them become full time businesses rather than embracing the short term sharing of resources within the community | |
what is the sharpe ratio | the sharpe ratio compares the return of an investment with its risk it s a mathematical expression of the insight that excess returns over a period of time may signify more volatility and risk rather than investing skill economist william f sharpe proposed the sharpe ratio in 1966 as an outgrowth of his work on the capital asset pricing model capm calling it the reward to variability ratio 1 sharpe won the nobel prize in economics for his work on capm in 1990 2the sharpe ratio s numerator is the difference over time between realized or expected returns and a benchmark such as the risk free rate of return or the performance of a particular investment category its denominator is the standard deviation of returns over the same period of time a measure of volatility and risk michela buttignolformula and calculation of the sharpe ratioin its simplest form sharpe ratio r p r f p where r p return of portfolio r f risk free rate p standard deviation of the portfolio s excess return begin aligned textit sharpe ratio frac r p r f sigma p textbf where r p text return of portfolio r f text risk free rate sigma p text standard deviation of the portfolio s excess return end aligned sharpe ratio p rp rf where rp return of portfoliorf risk free rate p standard deviation of the portfolio s excess return standard deviation is derived from the variability of returns for a series of time intervals adding up to the total performance sample under consideration the numerator s total return differential versus a benchmark rp rf is calculated as the average of the return differentials in each of the incremental time periods making up the total for example the numerator of a 10 year sharpe ratio might be the average of 120 monthly return differentials for a fund versus an industry benchmark the sharpe ratio s denominator in that example will be those monthly returns standard deviation calculated as follows | |
what the sharpe ratio can tell you | the sharpe ratio is one of the most widely used methods for measuring risk adjusted relative returns it compares a fund s historical or projected returns relative to an investment benchmark with the historical or expected variability of such returns the risk free rate was initially used in the formula to denote an investor s hypothetical minimal borrowing costs 1 more generally it represents the risk premium of an investment versus a safe asset such as a treasury bill or bond | |
when benchmarked against the returns of an industry sector or investing strategy the sharpe ratio provides a measure of risk adjusted performance not attributable to such affiliations | the ratio is useful in determining to what degree excess historical returns were accompanied by excess volatility while excess returns are measured in comparison with an investing benchmark the standard deviation formula gauges volatility based on the variance of returns from their mean the ratio s utility relies on the assumption that the historical record of relative risk adjusted returns has at least some predictive value 1generally the higher the sharpe ratio the more attractive the risk adjusted return the sharpe ratio can be used to evaluate a portfolio s risk adjusted performance alternatively an investor could use a fund s return objective to estimate its projected sharpe ratio ex ante the sharpe ratio can help explain whether a portfolio s excess returns are attributable to smart investment decisions or simply luck and risk for example low quality highly speculative stocks can outperform blue chip shares for considerable periods of time as during the dot com bubble or more recently the meme stocks frenzy if a youtuber happens to beat warren buffett in the market for a while as a result the sharpe ratio will provide a quick reality check by adjusting each manager s performance for their portfolio s volatility the greater a portfolio s sharpe ratio the better its risk adjusted performance a negative sharpe ratio means the risk free or benchmark rate is greater than the portfolio s historical or projected return or else the portfolio s return is expected to be negative alison czinkota investopediasharpe ratio pitfallsthe sharpe ratio can be manipulated by portfolio managers seeking to boost their apparent risk adjusted returns history this can be done by lengthening the return measurement intervals which results in a lower estimate of volatility for example the standard deviation volatility of annual returns is generally lower than that of monthly returns which are in turn less volatile than daily returns financial analysts typically consider the volatility of monthly returns when using the sharpe ratio calculating the sharpe ratio for the most favorable stretch of performance rather than an objectively chosen look back period is another way to cherry pick the data that will distort the risk adjusted returns the sharpe ratio also has some inherent limitations the standard deviation calculation in the ratio s denominator which serves as its proxy for portfolio risk calculates volatility based on a normal distribution and is most useful in evaluating symmetrical probability distribution curves in contrast financial markets subject to herding behavior can go to extremes much more often than a normal distribution would suggest is possible as a result the standard deviation used to calculate the sharpe ratio may understate tail risk market returns are also subject to serial correlation the simplest example is that returns in adjacent time intervals may be correlated because they were influenced by the same market trend but mean reversion also depends on serial correlation just like market momentum the upshot is that serial correlation tends to lower volatility and as a result investment strategies dependent on serial correlation factors may exhibit misleadingly high sharpe ratios as a result one way to visualize these criticisms is to consider the investment strategy of picking up nickels in front of a steamroller that moves slowly and predictably nearly all the time except for the few rare occasions when it suddenly and fatally accelerates because such unfortunate events are extremely uncommon those picking up nickels would most of the time deliver positive returns with minimal volatility earning high sharpe ratios as a result and if a fund picking up the proverbial nickels in front of a steamroller got flattened on one of those extremely rare and unfortunate occasions its long term sharpe might still look good just one bad month after all unfortunately that would bring little comfort to the fund s investors sharpe alternatives the sortino and the treynorthe standard deviation in the sharpe ratio s formula assumes that price movements in either direction are equally risky in fact the risk of an abnormally low return is very different from the possibility of an abnormally high one for most investors and analysts a variation of the sharpe called the sortino ratio ignores the above average returns to focus solely on downside deviation as a better proxy for the risk of a fund of a portfolio the standard deviation in the denominator of a sortino ratio measures the variance of negative returns or those below a chosen benchmark relative to the average of such returns another variation of the sharpe is the treynor ratio which divides excess return over a risk free rate or benchmark by the beta of a security fund or portfolio as a measure of its systematic risk exposure beta measures the degree to which the volatility of a stock or fund correlates to that of the market as a whole the goal of the treynor ratio is to determine whether an investor is being compensated for extra risk above that posed by the market example of how to use sharpe ratiothe sharpe ratio is sometimes used in assessing how adding an investment might affect the risk adjusted returns of the portfolio for example an investor is considering adding a hedge fund allocation to a portfolio that has returned 18 over the last year the current risk free rate is 3 and the annualized standard deviation of the portfolio s monthly returns was 12 which gives it a one year sharpe ratio of 1 25 or 18 3 12 the investor believes that adding the hedge fund to the portfolio will lower the expected return to 15 for the coming year but also expects the portfolio s volatility to drop to 8 as a result the risk free rate is expected to remain the same over the coming year using the same formula with the estimated future numbers the investor finds the portfolio would have a projected sharpe ratio of 1 5 or 15 3 divided by 8 in this case while the hedge fund investment is expected to reduce the absolute return of the portfolio based on its projected lower volatility it would improve the portfolio s performance on a risk adjusted basis if the new investment lowered the sharpe ratio it would be assumed to be detrimental to risk adjusted returns based on forecasts this example assumes that the sharpe ratio based on the portfolio s historical performance can be fairly compared to that using the investor s return and volatility assumptions | |
what is a good sharpe ratio | sharpe ratios above 1 are generally considered good offering excess returns relative to volatility however investors often compare the sharpe ratio of a portfolio or fund with those of its peers or market sector so a portfolio with a sharpe ratio of 1 might be found lacking if most rivals have ratios above 1 2 for example a good sharpe ratio in one context might be just a so so one or worse in another | |
what is a shell corporation | a shell corporation is a corporation without active business operations or significant assets these types of corporations are not all necessarily illegal but they are sometimes used illegitimately such as to disguise business ownership from law enforcement or the public legitimate reasons for a shell corporation include such things as a startup using the business entity as a vehicle to raise funds conduct a hostile takeover or to go public understanding shell corporationshell corporations are used by large well known public companies shady business dealers and private individuals alike for example in addition to the legal reasons above shell corporations act as tax avoidance vehicles for legitimate businesses as is the case with apple s corporate entities based in the united kingdom they are also used to obtain different forms of financing however tax avoidance is sometimes seen as a loophole to tax evasion as these corporations have been known to be used in black or gray market activities it s natural to be suspicious of a shell corporation and it s important to understand the various scenarios in which they arise reasons to legitimately set up a shell corporationthe number one reason for a domestic company to set up a shell company is to realize a tax haven abroad large corporations like in the apple example have decided to move jobs and profits offshore taking advantage of looser tax codes this is the process of offshoring or outsourcing work that was once conducted domestically to remain within legal bounds internationally american corporations will set up shell companies in the foreign countries in which they are offshoring work this is legally allowed by the united states and some say that it s the u s tax code itself that s forcing domestic companies to create shell corporations abroad another way that shell companies help with taxes surrounds the need for financial institutions to conduct financial activity in foreign markets this allows them to invest in capital markets outside of domestic borders and realize potential tax savings ways that people abuse shell companieseven though there are legitimate reasons to set up a shell company many wealthy individuals abuse shell companies for personal gain progressive taxation within the united states that is tax brackets slowly caused people to seek personal tax havens significantly high earners set themselves up as shell companies in one or many locations like the cayman islands this is a gray area of tax evasion where people funnel earnings through shell companies in such a way that it isn t counted toward personal income | |
what is the sherman antitrust act | the sherman antitrust act refers to a landmark u s law that banned businesses from colluding or merging to form a monopoly passed in 1890 the law prevented these groups from dictating controlling and manipulating prices in a particular market the act aimed to promote economic fairness and competitiveness while regulating interstate commerce the sherman antitrust act was the u s congress first attempt to address the use of trusts as a tool that enables a limited number of individuals to control certain key industries 1understanding the sherman antitrust actsen john sherman from ohio proposed the sherman antitrust act in 1890 it was the first measure the u s congress passed to prohibit trusts monopolies and cartels from taking over the general market it also outlawed contracts conspiracies and other business practices that restrained trade and created monopolies within industries 12at the time public hostility was growing toward large corporations like standard oil and the american railway union which were seen as unfairly monopolizing certain industries consumers felt they were hit with exorbitantly high prices on essential goods while competitors found themselves shut out because of deliberate attempts by large corporations to keep other enterprises out of the market 2this signaled an important shift in the american regulatory strategy toward business and markets after the 19th century rise of big business american lawmakers reacted with a drive to regulate business practices more strictly the sherman antitrust act paved the way for more specific laws like the clayton act measures like these had widespread popular support but lawmakers genuinely wanted to keep the american market economy broadly competitive in the face of changing business practices competing individuals or businesses are not permitted to fix prices divide markets or attempt to rig bids it also lays out specific penalties and fines intended for businesses that violate these rules the act can impose both civil and criminal penalties on companies that don t comply 1the sherman antitrust act was not designed to prevent healthy monopolistic competition but to target monopolies that resulted from a deliberate attempt to dominate the marketplace special considerationsantitrust laws refer broadly to the group of state and federal laws designed to ensure that businesses are competing fairly these laws exist to promote competition among sellers limit monopolies and give consumers options supporters say these laws are necessary for an open marketplace to exist and thrive competition is considered healthy for the economy giving consumers lower prices higher quality products and services more choice and greater innovation however opponents argue that allowing businesses to compete as they see fit instead of regulating competition would ultimately give consumers the best prices sections of the sherman antitrust actthe sherman antitrust act is divided into three key sections the act received immediate public approval but because the legislation s definition of concepts such as trusts monopolies and collusion was not clearly defined few business entities were actually prosecuted under its measures 2the sherman antitrust act was amended by the clayton antitrust act in 1914 which addressed specific practices that the sherman act did not ban it also closed loopholes that the sherman act established including those that dealt specifically with anti competitive mergers monopolies and price discrimination 1for example the clayton act prohibits appointing the same person to make business decisions for competing companies 1historical context of the sherman antitrust actthe sherman antitrust act was born against a backdrop of increasing monopolies and abuses of power by large corporations and railroad conglomerates 2congress passed the interstate commerce act in 1887 in response to increasing public indignation about abuses of power and malpractices by railroad companies this spawned the interstate commerce commission icc its purpose was to regulate interstate transportation entities the icc had jurisdiction over u s railroads and all common carriers requiring them to submit annual reports and prohibiting unfair practices such as discriminatory rates 45during the first half of the 20th century congress consistently expanded the icc s power so much that despite its intended purpose some believed that the icc was often guilty of assisting the very companies it was tasked to regulate by favoring mergers that created unfair monopolies 55congress passed the sherman antitrust act at the height of what mark twain called the gilded age of american history the gilded age which spanned from the 1870s to about 1900 was dominated by political scandal and robber barons the growth of railroads the expansion of oil and electricity and the development of america s first giant national and international corporations the gilded age was an era of rapid economic growth corporations took off during this time in part because they were easy to register and unlike today did not have to pay any incorporation fees late 19th century legislators understanding of trusts is different from our current concept of the term during that time trusts became an umbrella term for any sort of collusive or conspiratorial behavior that was seen to render competition unfair the term trust has evolved over the years though today it refers to a financial relationship in which one party gives another the right to hold property or assets for a third party example of the sherman antitrust acton oct 20 2020 the u s department of justice filed an antitrust lawsuit against google alleging that the online giant engaged in anti competitive conduct to preserve monopolies in search and search advertising deputy attorney general jeffrey rosen compared the complaint to past uses of the sherman act to stop monopolistic practices by corporations 6 as with its historic antitrust actions against at t in 1974 and microsoft in 1998 the department is again enforcing the sherman act to restore the role of competition and open the door to the next wave of innovation this time in vital digital markets rosen said in a press release 6 | |
what is the sherman antitrust act in simple terms | the sherman antitrust act is a law passed by congress to promote competition within the economy by prohibiting companies from colluding or merging to form a monopoly | |
why was the sherman antitrust act passed | the sherman antitrust act was passed to address concerns by consumers who felt they were paying high prices on essential goods and by competing companies who believed they were being shut out of their industries by larger corporations | |
what are the penalties for violating the sherman act | those found guilty of violating the sherman act can face a hefty punishment it is also a criminal law and offenders may serve prison sentences of up to 10 years beyond that there are also fines which can be up to 1 million for an individual and up to 100 million for a corporation in some cases heftier fines could also be issued worth twice the amount the conspirators gained from the illegal acts or twice the money lost by the victims 1 | |
have any of today s big name companies been accused of violating the sherman act | many household names have been hit with antitrust suits based in part on the sherman act other than google in recent years microsoft and apple have both faced complaints with the former accused of seeking to create a monopoly in internet browser software and the latter of unethically raising the price of its e books and in later years exploiting the market power of its app store | |
what is the difference between the sherman act and the clayton act | the clayton act was introduced later in 1914 to address some of the specific practices that the sherman act did not clearly prohibit or failed to properly clarify the sherman act the first of its kind was deemed too vague allowing some companies to find ways to maneuver around it 2essentially the clayton act deals with similar topics such as anti competitive mergers monopolies and price discrimination but adds more detail and scope to eliminate some of the previous loopholes over the years antitrust laws continue to be amended to reflect the current business environment and fresh observations 1 | |
what is a shooting star | a shooting star is a bearish candlestick with a long upper shadow little or no lower shadow and a small real body near the low of the day it appears after an uptrend 1 said differently a shooting star is a type of candlestick that forms when a security opens advances significantly but then closes the day near the open again for a candlestick to be considered a shooting star the formation must appear during a price advance also the distance between the highest price of the day and the opening price must be more than twice as large as the shooting star s body there should be little to no shadow below the real body | |
what does the shooting star tell you | shooting stars indicate a potential price top and reversal the shooting star candle is most effective when it forms after a series of three or more consecutive rising candles with higher highs it may also occur during a period of overall rising prices even if a few recent candles were bearish following the advance a shooting star opens and then rises strongly during the day this shows the same buying pressure seen over the last several periods as the day progresses though the sellers step in and push the price back down to near the open erasing the gains for the day this shows that buyers lost control by the close of the day and the sellers may be taking over the long upper shadow represents the buyers who bought during the day but are now in a losing position because the price dropped back to the open the candle that forms after the shooting star is what confirms the shooting star candle the next candle s high must stay below the high of the shooting star and then proceed to close below the close of the shooting star ideally the candle after the shooting star gaps lower or opens near the prior close and then moves lower on heavy volume a down day after a shooting star helps confirm the price reversal and indicates the price could continue to fall traders may look to sell or short sell if the price rises after a shooting star the price range of the shooting star may still act as resistance for example the price may consolidate in the area of the shooting star if the price ultimately continues to rise the uptrend is still intact and traders should favor long positions over selling or shorting example of how to use the shooting starin this example the stock is rising in an overall uptrend the uptrend accelerates just prior to the formation of a shooting star the shooting star shows the price opened and went higher upper shadow then closed near the open the following day closed lower helping to confirm a potential price move lower the high of the shooting star was not exceeded and the price moved within a downtrend for the next month if trading this pattern the trader could sell any long positions they were in once the confirmation candle was in place the difference between the shooting star and the inverted hammerthe inverted hammer and the shooting star look exactly the same they both have long upper shadows and small real bodies near the low of the candle with little or no lower shadow the difference is context a shooting star occurs after a price advance and marks a potential turning point lower an inverted hammer occurs after a price decline and marks a potential turning point higher limitations of the shooting starone candle isn t all that significant in a major uptrend prices are always gyrating so the sellers taking control for part of one period like in a shooting star may not end up being significant at all this is why confirmation is required selling must occur after the shooting star although even with confirmation there is no guarantee the price will continue to fall or how far after a brief decline the price could keep advancing in alignment with the longer term uptrend utilize stop losses when using candlesticks so when they don t work out your risk is controlled also consider using candlesticks in conjunction with other forms of analysis a candlestick pattern may take on more significance if it occurs near a level that has been deemed important by other forms of technical analysis | |
what is a short position | a short or a short position is created when a trader sells a security first with the intention of repurchasing it or covering it later at a lower price a trader may decide to short a security when they believe that the price of that security is likely to decrease in the near future there are two types of short positions naked and covered a naked short is when a trader sells a security without having possession of it however that practice is illegal in the u s for equities it is banned fully in india and other countries a covered short is when a trader borrows the shares from a stock loan department in return the trader pays a borrowing rate during the time the short position is in place in the futures or foreign exchange markets short positions can be created at any time investopedia nono floresunderstanding short positions | |
when creating a short position one must understand that the trader has a finite potential to earn a profit and infinite potential for losses that is because the potential for a profit is limited to the stock s distance to zero however a stock could potentially rise for years making a series of higher highs one of the most dangerous aspects of being short is the potential for a short squeeze | a short squeeze is when a heavily shorted stock suddenly begins to increase in price as traders that are short begin to cover the stock one famous short squeeze occurred in october 2008 when the shares of volkswagen surged higher as short sellers scrambled to cover their shares during the short squeeze the stock rose from roughly 200 to 1 000 in a little over a month image by sabrina jiang investopedia 2022 | |
how to set up a short position | in order to place a short order an investor must first have access to this type of order within their brokerage account since margin and interest will be incurred in a short trade this means that you need to have a margin account in order to set up a short position once you have the correct type of account along with any necessary permissions the order details are entered on the order screen just like for any other trade just remember that you are selling first to open a position in hopes of closing the trade by buying the asset back in the future at a lower price in the case of a short position the entry price is the sale price while the exit price is the buy price it is also important to remember that trading on margin does entail interest margin requirements and possibly other brokerage fees example of a short positiona trader thinks that amazon s stock is poised to fall after it reports quarterly results to take advantage of this possibility the trader borrows 1 000 shares of the stock from their stock loan department with the intent to short the stock the trader then goes out and sells short the 1 000 shares for 1 500 in the following weeks the company reports weaker than expected revenue and guides for a weaker than expected forward quarter as a result the stock plunges to 1 300 the trader then buys to cover the short position the trade results in a gain of 200 per share or 200 000 | |
what is margin | in finance the margin is the collateral that an investor has to deposit with their broker or exchange to cover the credit risk the holder poses for the broker or the exchange for example a short position cannot be established without sufficient margin in the case of short sales under regulation t the federal reserve board requires all short sale accounts to have 150 of the value of the short sale at the time the sale is initiated the 150 consists of the full value of the short sale proceeds 100 plus an additional margin requirement of 50 of the value of the short sale 1 | |
how much can i lose on a short position | short selling occurs when a trader borrows a security and sells it on the open market planning to buy it back later for less money theoretically the price of an asset has no upper bound and can climb to infinity this means that in theory the risk of loss on a short position is unlimited | |
what is a short squeeze | short positions represent borrowed shares that have been sold in anticipation of buying them back in the future as the underlying asset prices rise investors are faced with losses to their short position aside from the pressure of mounting paper losses maintaining a short position can also become more difficult because if the price of the underlying asset rises so does the amount of margin required as collateral to ensure that the investor will be able to buy back the shares and return them to the broker | |
when investors are forced to buy back shares to cover their position it is referred to as a short squeeze if enough short sellers are forced to buy back shares at the same time then it can result in a surge in demand for shares and therefore an extremely sharp rise in the underlying asset s price | the bottom linewhile it sounds illegal to sell something you don t own the market is tightly regulated when traders believe that a security s price is likely to decline in the near term they may enter a short position by selling the security first with the intention of buying it later at a lower price to set up a short position traders generally borrow shares of the security from their brokerage this means that going short requires a margin account as well as other potential permissions and possible broker fees if the price of a shorted security begins to rise rather than fall the losses can mount up quickly in fact since the price of the security has no ceiling the losses on a short position are theoretically unlimited given this inherent riskiness and the complexity of the transaction shorting securities is generally recommended only for more advanced traders and investors | |
what is a short call | a short call is an options position taken as a trading strategy when a trader believes that the price of the asset underlying the option will drop therefore it s considered a bearish trading strategy short calls have limited profit potential and the theoretical risk of unlimited loss they re usually used only by experienced traders and investors | |
how a short call works | a short call strategy is one of two simple ways options traders can take bearish positions it involves selling call options or calls calls give the holder of the option the right to buy the underlying security at a specified price the strike price before the option contract expires the seller or writer of the call option receives the premium the buyer pays for the call the seller must deliver the underlying shares to the call buyer if the buyer exercises the option the success of the short call strategy rests on the option contract expiring worthless that way the trader banks the profit from the premium the expired position will be removed from their account for this to happen the price of the underlying security must fall below the strike price if it does the buyer won t exercise the option if the price rises the option will be exercised because the buyer can get the shares at the strike price and immediately sell them at the higher market price for a profit for the seller there s unlimited exposure during the length of time the option is viable that s because the underlying security s price could rise above the strike price during this time and keep rising the option would be exercised at some point before expiration once that happens the seller has to go into the market and buy the shares at the current price that price could potentially be much higher than the strike price that the buyer will be paying a seller of a call who doesn t already own the underlying shares of an option is selling a naked short call to limit losses some traders will exercise a short call while owning the underlying security this is known as a covered call or alternatively they may simply close out their naked short position accepting a loss that s less than what they d lose if the option were assigned exercised example of a short callsay that shares of humbucker holdings are trading near 100 and are in a strong uptrend however based on a combination of fundamental and technical analyses a trader believes that humbucker is overvalued they feel that eventually it will fall to 50 a share with that in mind the trader decides to sell a call with a strike price of 110 and a premium of 1 00 they receive a net premium credit of 100 1 00 x 100 shares the price of humbucker stock does indeed drop the calls expire worthless and unexercised the trader gets to enjoy the full amount of the premium as profit the strategy worked however things could instead go awry humbucker share prices could continue moving up rather than go down this creates a theoretically limitless risk for the call writer for example say the shares move up to 200 within a few months the call holder exercises the option and buys the shares at the 90 dollar strike price the shares must be delivered to the call holder the call writer enters the market buys 100 shares at the current market price of it turns out 200 per share this is the trader s result buy 100 shares at 200 per share 20 000receive 90 per share from buyer 9 000loss to trader is 20 000 9 000 11 000 trader applies 100 premium received for a total loss of 10 900 short calls can be extremely risky due to the potential for loss if they re exercised and the short call writer has to buy the shares that must be delivered short calls vs long putsas previously mentioned a short call strategy is one of two basic bearish strategies involving options the other is buying puts put options give the holder the right to sell a security at a certain price within a specific time frame going long on puts as traders say is also a bet that prices will fall but the strategy works differently say that our trader still believes humbucker stock is headed for a fall they opt to buy a put with a 90 strike price for a 1 00 premium the trader spends 100 for the right to sell shares at 90 even if the actual market price falls to 50 of course if the stock does not drop below 90 the trader will have lost the premium paid for the protection | |
why would someone sell call options | investors who believe that the price of a security is going to fall might sell calls on that security simply for income in other words they ll profit just from the premium they received for selling the option however for the strategy to succeed the option has to expire unexercised by the buyer | |
what s the risk of a naked short call | a naked short call refers to a situation where traders sell call options but don t already own the underlying securities that they would be obligated to deliver if the buyer exercises the calls so the risk is that the market price for the security goes up above the option strike price the buyer exercises the option and traders must enter the market to buy the securities for a price way above what they ll receive for them the strike price | |
what is short covering | short covering refers to buying back borrowed securities in order to close out an open short position at a profit or loss it requires purchasing the same security that was initially sold short and handing back the shares initially borrowed for the short sale 1 this type of transaction is referred to as buy to cover for example a trader sells short 100 shares of xyz at 20 based on the opinion that those shares will head lower if xyz declines to 15 the trader buys back xyz to cover the short position booking a 500 profit from the sale investopedia ellen lindner | |
how does short covering work | short covering is necessary in order to close an open short position a short position will be profitable if it is covered at a lower price than the initial transaction it will incur a loss if it is covered at a higher price than the initial transaction when there is a great deal of short covering occurring in a security it may result in a short squeeze wherein short sellers are forced to liquidate positions at progressively higher prices as they lose money and their brokers invoke margin calls short covering can also occur involuntarily when a stock with very high short interest is subjected to a buy in this term refers to the closing of a short position by a broker dealer when the stock is extremely difficult to borrow and lenders are demanding it back oftentimes this occurs in stocks that are less liquid with fewer shareholders monitoring short interestthe higher the short interest and short interest ratio sir the greater the risk that short covering may occur in a disorderly fashion 2 short covering is generally responsible for the initial stages of a rally after a prolonged bear market or a protracted decline in a stock or other security short sellers usually have shorter term holding periods than investors with long positions due to the risk of runaway losses in a strong uptrend as a result short sellers are generally quick to cover short sales on signs of a turnaround in market sentiment or a security s bad fortunes example of short coveringto close out a short position traders need to buy back the shares referred to as short covering and return them to the stock lender consider that xyz has 50 million shares outstanding 10 million shares sold short and an average daily trading volume adtv of 1 million shares xyz has a short interest of 20 and a sir of 10 both of which are quite high suggesting that short covering could be difficult xyz loses ground over several weeks spurring traders to open short positions in the stock one morning before they open the company announces a major upward revision in quarterly earnings xyz gaps higher at the opening bell placing traders positions into a significant loss some decide to wait for a more favorable price and hold off on covering while other short sellers exit their positions aggressively this disorderly short covering causes a sharp spike in the xyz share price creating a feedback loop that continues until the short squeeze exhausts itself traders who delayed short covering risk having to buy back the shares at a higher and higher prices exposing themselves to greater risk the gamestop short squeezea short squeeze occurs when investors who have shorted a stock or borrowed shares to sell with the expectation of buying them back at a lower price are forced to buy back those shares at a higher price to limit their losses it leads to a sudden surge in demand for the stock causing investors to buy back shares quickly driving the price even higher a meme stock buying frenzy in january 2021 led to a short squeeze in brick and mortar video game retailer gamestop causing several hedge funds to suffer significant losses 3as a result of the shift to online gaming and declining sales several prominent funds had built a large short position in gamestop retail traders noticed this high level of short interest in the stock and worked together through reddit trading group wallstreetbets to drive up the stock price by buying shares and options contracts as more investors piled into gamestop the stock price began to climb rapidly causing some of the hedge funds with short positions to suffer steep losses in an attempt to reduce risk some of these funds began buying back shares at a much higher price than they had initially sold them for to protect against a further rising prices institutional investors lost roughly 19 billion short selling gamestop in january 2021 according to data cited by business insider 4the squeeze was exacerbated by several hedge funds shorting more shares than the available float of shares in the market making it nearly impossible to cover all their short positions 5 this added immense pressure to buy back shares at any available price further pushing up the stock price the frenzied buying by retailer traders resulted in short covering by institutional investors creating a feedback loop that kept pushing gamestop shares higher ultimately the squeeze caused some hedge funds to lose billions of dollars and the stock price to rise from around 20 per share to over 400 in just a few weeks | |
how does short covering work | short covering works by closing out a short position that an investor has made by buying back shares that were initially borrowed and sold when an investor shorts a stock they borrow shares from a stock lender and sell them on the market with the expectation of buying them back at a lower price in the future if the stock goes down the investor s short position generates a profit but if it goes up it results in a loss increased short covering has the potential to trigger a short squeeze and cause significant losses | |
what s the difference between short interest and the short interest ratio | short interest refers to the total number of shares that have been sold short in a specific security that has not been covered or closed out investors use the metric as a measure of bearish sentiment short interest can be expressed as a percentage of the total shares outstanding or as a ratio of the total shares that a company has available for trading by comparison the sir takes the number of shares held short in a stock and divides the figure by the stock s average daily trading volume investors use this metric to determine how many days it would take to cover all short positions in a stock | |
how did short covering contribute to the gamestop short squeeze | retail traders noticed a high level of short interest in gamestop and worked together through reddit trading group wallstreetbets to coordinate frenzied buying in the company s shares and options the increased sudden buying pressure forced several hedge funds who had bet against the videogame retailer to promptly cover their large short positions at a significant loss creating a short squeeze in the stock the short squeeze was exacerbated by several funds shorting more shares than the available float of shares in the market making it difficult to cover all their short positions | |
what risks are associated with short covering | investors who cover a short position at a higher price than they initially shorted the stock for will incur a loss the act of short covering can trigger further buying creating a short squeeze in the stock increasing the potential for significant losses as traders scramble to buy back shares at progressively higher prices before initiating a short position investors should monitor a stock s short interest and sir to determine the likelihood of a short squeeze occurring the bottom lineshort covering refers to buying back borrowed securities to close out open short positions short sellers usually hold for less time than investors with long positions due to the potential for a short squeeze caused by an acceleration in buying pressure and short covering as a result short sellers generally cover short sales quickly on a turnaround in market sentiment to limit potential losses the higher the short interest and sir in a stock s float the greater the risk that short covering may occur in a disorderly fashion leading to short squeezes a meme stock buying frenzy such as the gamestop short squeeze in early 2021 can result in significant losses for institutional investors with large short positions | |
what is short interest | short interest is the number of shares that have been sold short and remain outstanding traders typically sell a security short if they anticipate that price will decline by borrowing shares of stock the investor then sells these borrowed shares to buyers willing to pay the market price short interest is often an indicator of current market sentiment an increase in short interest often signals that investors have become more bearish while a decrease in short interest signals that they have become more bullish short interest is often expressed as a number or percentage the financial industry regulatory authority finra requires firms to report short interest positions in all customer and proprietary accounts in all equity securities twice a month 1 | |
what does short interest signal | short interest can provide insight into the potential direction of an individual stock as well as how bullish or bearish investors are about the market overall stock exchanges measure and report on short interest and issue reports each month providing investors a tool to use as a short selling benchmark a large increase or decrease in a stock s short interest from the previous month can indicate investor sentiment if the short interest for a stock rises from 10 to 20 it may be a warning sign that negative sentiment is growing toward the company as the number of investors who expect the stock price to decrease has doubled short interest can also be converted into a ratio also known as days to cover by taking the number of short shares and dividing it by the average daily trading volume the short interest ratio indicates how many days it would take for all of a stock s shares that are sold short to be covered or repurchased in the market if short interest is one million shares and its average daily trading volume is 100 000 shares it will take at least 10 days on average for the shorts to be able to cover their positions short interest ratio short interest average daily trading volumethis ratio indicates how many days it would take for all of a stock s shares that are sold short to be covered or repurchased in the market | |
how to use short interest | if a stock has a rising level of short interest it doesn t mean that the stock will fall in price but only that a high number of investors are betting that the stock will fall in price an investor can calculate short interest or short float for a stock by dividing the number of shares sold short by the float by the total number of shares available for the public to buy short float percentage number of shares sold short number of shares in floatthis percentage indicates the percentage of shares available to the public that is borrowed if a company has 10 million shares of stock outstanding and 1 million shares are sold short the total short interest is 10 short interest can be used as an indicator of market sentiment for a company s stock or the market as a whole and some bullish investors see high short interest as an opportunity there are some limitations to using short interest as a marker short interest reports such as those provided monthly by the new york stock exchange nyse are not timely and may not reflect market conditions 2 also stock can be heavily shorted for a long period without seeing a short squeeze or a price decline | |
what are the limitations of using short interest | short interest is a useful tool but should not be the sole determinant of an investment decision changes in short interest and even extremes may not lead to significant price changes in a timely fashion a stock can stay at an extreme reading for long periods or a major price decline short interest is published only monthly by most exchanges so traders are using slightly outdated information and the actual short interest may already be significantly different than what the report indicates | |
what is a short squeeze | a short squeeze occurs when a high number of short sellers attempt to cut their losses and exit their short positions by purchasing their borrowed shares due to panic about potential losses also a short squeeze often occurs if a stock price rises | |
how does short interest compare to a put call ratio | short interest and the put call ratio are both indicators of market sentiment short interest focuses on the number of short shares outstanding the put call ratio uses the options market for its data put options are bearish bets while calls are bullish bets changes in the put call ratio are another gauge that can be used to determine whether investors are expecting prices to rise or fall in the future | |
what is a good short interest | short interest as a percentage of float below 10 indicates strong positive sentiment short interest as a percentage of float above 10 is fairly high indicating significant pessimistic sentiment short interest as a percentage of float above 20 is extremely high | |
is 20 a high short interest | yes short interest as a percentage of float above 20 is considered high and it indicates a very pessimistic sentiment the bottom lineshort interest indicates how many shares of a company are currently sold short and not yet covered short interest is often expressed as a number yet it is more telling as a percentage an increase in short interest often signals that investors have become more bearish while a decrease in short interest shows they have become more bullish short interest can be used as an indicator of market sentiment for a company s stock or the market as a whole and some investors use this as an indication that it might be profitable to short that company s stock | |
what is the short interest ratio | the short interest ratio takes the number of shares held short in a stock and it divides this by the stock s average daily trading volume simply put the ratio can help an investor find out very quickly if a stock is heavily shorted or not shorted versus its average daily trading volume the term is sometimes used interchangeably with days to cover the formula for short interest ratio is | |
what the short interest ratio can tell you | the ratio tells an investor if the number of shares short is high or low versus the stock s average trading volume the ratio can rise or fall based on the number of shares short however it can also increase or decrease as volume levels change example of how to use the short interest ratiothe tesla chart below shows the short interest ratio the number of shares short and the daily average trading volume in the example one can see that a rising short interest ratio does not always correspond to rising short interest in july and august 2016 the short interest ratio rose despite the number of shares short falling that was because the daily average volume fell sharply during that time additionally the short interest was steadily declining in 2018 despite short interest being elevated because the average daily volume was steadily rising on the stock the difference between a short interest ratio and short interestit is essential to remember that the short interest ratio and short interest are not the same short interest measures the total number of shares that have been sold short in the market the short interest ratio is a formula used to measure how many days it would take for all the shares short in the marketplace to be covered limitations of using the short interest ratiothe short interest ratio has several flaws the first being that it is not updated regularly short interest is reported every two weeks and is usually as of the 15th and the last day of the month it takes several days before the information is published and by that time the number of shares short in the market may have already changed additionally one must consider how news or events may impact trading volumes and make the ratio expand or contract the ratio should always be compared with the actual short interest and trading volumes to get the full picture | |
what is a short put | a short put refers to when a trader opens an options trade by selling or writing a put option the trader who buys the put option is long that option and the trader who wrote that option is short the writer short of the put option receives the premium option cost and the profit on the trade is limited to that premium basics of the short puta short put is also known as an uncovered put or a naked put if an investor writes a put option that investor is obligated to purchase shares of the underlying stock if the put option buyer exercises the option the short put holder could also face a substantial loss prior to the buyer exercising or the option expiring if the price of the underlying falls below the strike price of the short put option short put mechanicsa short put occurs if a trade is opened by selling a put for this action the writer seller receives a premium for writing an option the writer s profit on the option is limited to that premium received initiating an option trade to open a position by selling a put is different than buying an option and then selling it in the latter the sell order is used to close a position and lock in a profit or loss in the former the sell writing is opening the put position if a trader initiates a short put they likely believe the price of the underlying will stay above the strike price of the written put if the price of the underlying stays above the strike price of the put option the option will expire worthless and the writer gets to keep the premium if the price of the underlying falls below the strike price the writer faces potential losses some traders use a short put to buy the underlying security for example assume you want to buy a stock at 25 but it currently trades at 27 selling a put option with a strike of 25 means if the price falls below 25 you will be required to buy that stock at 25 which you wanted to do anyway the benefit is that you received a premium for writing the option if you received a 1 premium for writing the option then you have effectively reduced your purchase price to 24 if the price of the underlying doesn t drop below 25 you still keep the 1 premium image by sabrina jiang investopedia 2020risks of selling putsthe profit on a short put is limited to the premium received but the risk can be significant when writing a put the writer is required to buy the underlying at the strike price if the price of the underlying falls below the strike price the put writer could face a significant loss for example if the put strike price is 25 and the price of the underlying falls to 20 the put writer is facing a loss of 5 per share less the premium received they can close out the option trade buy an option to offset the short to realize the loss or let the option expire which will cause the option to be exercised and the put writer will own the underlying at 25 if the option is exercised and the writer needs to buy the shares this will require an additional cash outlay in this case for every short put contract the trader will need to buy 2 500 worth of stock 25 x 100 shares short put exampleassume an investor is bullish on hypothetical stock xyz corporation which is currently trading at 30 per share the investor believes the stock will steadily rise to 40 over the next several months the trader could buy shares but this would require 3 000 in capital to buy 100 shares writing a put option generates income immediately but could create a loss later on if the stock price falls as could buying the shares the investor writes one put option with a strike price of 32 50 expiring in three months at 5 50 therefore the maximum gain is limited to 550 5 50 x 100 shares which occurs if the stock closes at 32 5 or higher at expiration the maximum loss is 2 700 or 32 50 5 50 x 100 shares the maximum loss occurs if the underlying falls to zero and the put writer is assigned to buy the shares at 32 50 the maximum loss is partially offset by the premium received from selling the option | |
what is the short run | short run is an economic concept that states that within a certain period in the future at least one input is fixed while others are variable it expresses the idea that an economy behaves differently depending on the length of time it has to react to certain stimuli the short run does not refer to a specific duration of time but rather is unique to the firm industry or economic variable being studied | |
what is a short sale | a short sale is the sale of an asset such as a bond or stock that the seller does not own it is generally a transaction in which an investor borrows a security from a broker and then sells it in anticipation of a price decline the seller is then required to return an equal number of shares at some point in the future the assumption behind a short sale is that if the price declines the seller can buy the security back at the lower price and return it to the broker in contrast a seller in a long position owns the security or stock hispanollstic getty imagesunderstanding short salesa short sale is a transaction in which the seller does not actually own the stock that is being sold instead it is borrowed from the broker dealer through which they are placing the sell order the seller must then buy back the stock at some point in the future short sales are margin transactions and their equity reserve requirements are more stringent than for purchases brokers borrow the shares for short sale transactions from custody banks and fund management companies which lend them as a revenue stream firms that provide for securities lending include charles schwab and fidelity investments 12the main advantage of a short sale is that it allows traders to profit from a drop in price short sellers aim to sell shares while the price is high and then buy them later after the price has dropped short sales are considered risky because if the stock price rises instead of declines there is theoretically no limit to the investor s possible loss as a result most experienced short sellers will use a stop loss order so that if the stock price begins to rise the short sale will be automatically covered with only a small loss be aware however that the stop loss triggers a market order with no guaranteed price this can be a risky strategy for volatile or illiquid stocks short sellers can buy the borrowed shares and return them to the broker any time before they re due returning the shares shields the short seller from any further price increases or decreases the stock may experience short sale margin requirementsshort sales allow for leveraged profits because these trades are always placed on margin which means that the full amount of the trade does not have to be paid for therefore the entire gain realized from a short sale can be much larger than the available equity in an investor s account would otherwise permit the margin rule requirements for short sales dictate that 150 of the value of the shares shorted needs to be initially held in the account therefore if the value of the shares shorted is 25 000 the initial margin requirement would be 37 500 this prevents the proceeds from the sale from being used to purchase other shares before the borrowed shares are returned 3however since this includes the 25 000 from the short sale the investor is only putting up 50 or 12 500 4short sales are typically executed by investors who think the price of the stock being sold will decrease in the short term such as a few months short sale risksshort selling has many risks that make it unsuitable for a novice investor short selling limits maximum gains while potentially exposing the investor to unlimited losses a stock can only fall to zero resulting in a 100 loss for a long investor but there is no limit to how high a stock can theoretically go a short seller who has not covered their position with a stop loss buyback order can suffer tremendous losses if the stock price rises instead of falls for example consider a company that becomes embroiled in a scandal when its stock is trading at 70 per share an investor sees an opportunity to make a quick profit and sells the stock short at 65 but then the company is able to quickly exonerate itself from the accusations by coming up with tangible proof to the contrary the stock price quickly rises to 80 a share leaving the investor with a loss of 15 per share for the moment if the stock continues to rise so do the investor s losses short selling also involves significant expenses these include the costs of another major obstacle that short sellers must overcome is market efficiency markets have historically moved in an upward trend over time which works against profiting from broad market declines in any long term sense furthermore the overall efficiency of the markets often builds the effect of any kind of bad news about a company into its current price for instance if a company is expected to have a bad earnings report in most cases the price will have already dropped by the time earnings are announced therefore to make a profit short sellers must anticipate a drop in a stock s price before the market analyzes its cause short sellers also need to consider the risk of short squeezes and buy ins finally regulatory risks arise with bans on short sales in a specific sector or in the broad market to avoid panic and selling pressures near perfect timing is required to make short selling work unlike the buy and hold method that allows time for an investment to work itself out only experienced traders should sell short as it requires discipline to cut a losing short position rather than adding to it and hoping it will work out to be successful short sellers must find companies that are fundamentally misunderstood by the market e g enron and worldcom for example a company that is not disclosing its current financial condition can be an ideal target for a short seller while short sales can be profitable under the right circumstances they should be approached carefully by experienced investors who have done their homework on the company they are shorting both fundamental and technical analysis can be useful tools in determining when it is appropriate to sell short criticism of short salesbecause it can damage a company s stock price short sales have many critics including companies that have been shorted legendary investor warren buffett welcomes short sellers the more shorts the better because they have to buy the stock later on he is reported to have said according to him short sellers are necessary correctives who sniff out wrongdoing or problematic companies in the market 5before attempting to sell short enroll in one of the best investing courses you can find to learn more about the risks rewards and trading techniques of this investment strategy example of a short salesuppose an investor borrows 1 000 shares at 25 each or 25 000 let s say the shares fall to 20 and the investor closes the position to close the position the investor needs to purchase 1 000 shares at 20 each or 20 000 the investor captures the difference between the amount they receive from the short sale and the amount they paid to close the position or 5 000 short sale in real estatein real estate a short sale is the sale of real estate in which the net proceeds are less than the mortgage owed or the total amount of lien debts that secure the property in a short sale the sale is executed when the mortgagee or lienholder accepts an amount less than what is owed and when the sale is an arm s length transaction although not the most favorable transaction for buyers and lenders it is preferred over foreclosure | |
why would an investor make a short sale transaction | the two most common reasons an investor might want to short sell a security are who loses in short selling the trader loses if the stock they are shorting rises in price instead if that happens they must make up the price difference losing money in the process | |
how do investors make money in a short sale | to make money in a short sale the investor must repurchase the shares they borrowed at a lower price than the initial purchase the difference is the investor s profit on the transaction minus commissions or fees if any the bottom linein a short sale an investor borrows stocks to sell at one price with the intention of repurchasing them at a lower price and pocketing the difference short selling is a risky strategy as losses are magnified while gains are limited short selling should only be done by experienced investors who understand the risks of this trading strategy | |
what is short selling | short selling is a trading strategy where investors speculate on a stock s decline short sellers bet on and profit from a drop in a security s price traders use short selling as speculation and investors or portfolio managers may use it as a hedge against the downside risk of a long position jessica olah investopedia | |
how short selling works | traders commonly engage in short selling for speculation and hedging to open a short position a trader must have a margin account and pay interest on the value of the borrowed shares while the position is open the financial industry regulatory authority finra which enforces the rules and regulations governing registered brokers and broker dealer firms in the united states the new york stock exchange nyse and the federal reserve have set minimum values for the amount that the margin account must maintain known as the maintenance margin 1a broker handles locating shares that can be borrowed and returning them at the end of the trade opening and closing the trade can be done through regular trading platforms with brokers qualified to perform margin trading to short sell traders commonly follow these steps timing and conditionstiming is crucial when it comes to short selling stocks typically decline much faster than they advance and a sizable gain in the stock may be wiped out with an earnings miss or other bearish development conversely entering the trade too early may make it difficult to hold on to the short position in light of the costs involved and potential losses which rise if the stock increases rapidly short sellers commonly look for opportunities during the following conditions short selling costsunlike buying and holding stocks or investments short selling involves significant costs in addition to the usual trading commissions paid to brokers some costs include shorting is known as margin trading traders borrow money from the brokerage firm using the investment as collateral investors must meet the minimum maintenance requirement of 25 if the account slips below this traders are subject to a margin call and forced to put in more cash or liquidate their position 1short selling strategiesimagine a trader who believes that xyz stock currently trading at 50 will decline in price in the next three months they borrow 100 shares and sell them to another investor the trader is now short 100 shares since they sold something they did not own but had borrowed a week later the company whose shares were shorted reports dismal financial quarterly results and the stock falls to 40 the trader closes the short position and buys 100 shares for 40 on the open market to replace the borrowed shares the trader s profit on the short sale excluding commissions and interest on the margin account is 1 000 based on the following calculations 50 40 10 and 10 x 100 shares 1 000 using the scenario above suppose the trader did not close out the short position at 40 but decided to leave it open to capitalize on a further price decline however a competitor swoops in to acquire the company with a takeover offer of 65 per share and the stock soars if the trader decides to close the short position at 65 the loss on the short sale would be 1 500 based on the following calculations 50 65 negative 15 and negative 15 100 shares 1 500 loss in this case the trader had to buy back the shares at a significantly higher price to cover their position the primary objective of hedging is protection as opposed to the profit motivation of speculation hedging aims to protect gains or mitigate losses in a portfolio the costs of hedging are twofold there s the actual cost of putting on the hedge such as the expenses associated with short sales or the premiums paid for protective options contracts also there s the opportunity cost of capping the portfolio s upside if markets continue higher if 50 of a portfolio with a close correlation to the standard poor s 500 index s p 500 is hedged and the index moves up 15 over the next 12 months the portfolio would only record approximately half of that gain or 7 5 investors can choose short selling through exchange traded funds etfs a safer strategy due to the lower risk of a short squeeze put options provide an alternative to short selling by enabling investors to profit from a stock price drop without the need for margin advantages and disadvantagesif the seller predicts the price moves correctly they can make a positive return on investment primarily if they use margin to initiate the trade using margin provides leverage which means the trader does not need to put up much of their capital as an initial investment if done carefully short selling can be an inexpensive hedge a counterbalance to other portfolio holdings a trader who has shorted stock can lose much more than 100 of their original investment the risk comes because there is no ceiling for a stock s price also while the stocks were held the trader had to fund the margin account when it comes time to close a position a short seller might have trouble finding enough shares to buy if many other traders are shorting the stock or the stock is thinly traded conversely sellers can get caught in a short squeeze loop if the market or a particular stock starts to skyrocket a short squeeze happens when a stock rises and short sellers cover their trades by buying back their short positions possibility of high profitslittle initial capital requiredleveraged investments possiblehedge against other holdingspotentially unlimited lossesmargin account necessarymargin interest incurredshort squeezesregulationseach country sets restrictions and regulates short selling in its markets in the u s short selling is regulated by the u s securities and exchange commission sec under the securities exchange act of 1934 regulation sho implemented in 2005 is the primary rule governing short selling that mandates short sales can only be executed in a tick up or zero plus tick market meaning the security price must be moving upward at the time of the short sale 2according to regulation sho brokers must locate a party willing to lend the shorted shares or they must have reasonable grounds to believe that the shares could be borrowed this prevents naked short selling where investors sell shares they have not borrowed 2the sec can impose temporary short selling bans on specific stocks under certain conditions such as extreme market volatility 3in october 2023 the sec added regulations requiring investors to report their short positions to the sec and companies that lend shares for short selling to report this activity to finra 4 these new rules come after increased scrutiny of short selling particularly following the gamestop gme meme stock saga in 2021 when retail investors drove up the stock price causing losses for hedge funds that had shorted the company regulations vary by region the european securities and markets authority esma oversees short selling in the eu positions exceeding 0 2 of issued shares must be disclosed to regulators and those exceeding 0 5 must be publicly disclosed 5 in hong kong the securities and futures commission sfc regulates short selling which is only allowed for designated securities and must be backed by borrowed shares naked short selling is illegal 6 | |
what is a short squeeze | a short squeeze happens in financial markets when the price of an asset rises sharply causing traders who had sold short to close their positions it occurs when a security has a significant amount of short sellers meaning lots of investors are betting on its price falling a short squeeze begins when the price of an asset unexpectedly jumps higher it gains momentum as a significant number of the short sellers decide to cut losses and exit their positions investopedia julie bang | |
how does a short squeeze work | short sellers make their trades expecting that the price of a stock will fall when a heavily shorted stock unexpectedly rises in price instead the short sellers may have to act fast to limit their losses short sellers borrow shares of an asset that they believe will drop in price in order to buy them after they fall if they re right they return the shares and pocket the difference between the price when they initiated the short and the price when they buy the shares back to close out the short position if they re wrong they re forced to buy at a higher price and pay the difference between the price they set and its sale price because short sellers exit their positions with buy orders the coincidental exit of these short sellers pushes prices higher the continued rapid rise in price also attracts buyers to the security the combination of new buyers and panicked short sellers creates a rapid rise in price that can be stunning and unprecedented a short squeeze gets its name because short sellers are being squeezed out of their positions usually at a loss short sellers zero in on a stock that they think is overvalued by the market for example tesla inc tsla captured the enthusiasm of many investors with its innovative approach to producing and marketing electric vehicles investors bet heavily on its potential short sellers bet heavily on its failure in early 2020 tesla was the most shorted stock on the u s exchanges with more than 18 of its outstanding stock in short positions 1from late 2019 through early 2020 tesla stock soared by 400 short sellers got hammered collectively losing about 8 billion 1 in early march 2020 tesla s stock finally fell along with most others during a market downturn however the stock eventually bounced back leaving tesla short sellers collectively nursing losses of more than 40 billion during the course of 2020 2 | |
why short squeezes happen | short sellers open positions on stocks that they believe will decline in price however sound their reasoning a positive news story a product announcement or an earnings beat that excites the interest of buyers can upend this the turnaround in the stock s fortunes may prove to be temporary but if it s not short sellers can face runaway losses as the expiration date on their positions approaches they generally opt to exit their positions immediately even if it means taking a substantial loss that s where the short squeeze comes in every buying transaction by a short seller sends the price higher forcing another short seller to buy the percentage of tesla stock that represented short interest in late 2019 its stock price quadrupled and short sellers lost billions 1 | |
when identifying stocks at risk of a short squeeze two useful measures are short interest and the short interest ratio | short interest is the total number of shares sold short as a percentage of the total shares outstanding the short interest ratio is the total number of shares sold short divided by the stock s average daily trading volume speculative stocks tend to have higher short interest than more stable companies watching short interest can tell you whether investor sentiment about a company is changing for example if a stock typically has a 15 to 30 short interest a move above or below that range could signal that investors have shifted their view of the company fewer short shares could mean that the price has risen too high too quickly or that the short sellers are leaving the stock because it has become too stable a rise in short interest above the norm indicates that investors have become more bearish but an extremely high reading could be a sign of a coming short squeeze which could force the price higher contrarian investors may buy stocks with heavy short interest to exploit the potential for a short squeeze a rapid rise in the stock price is attractive but it is not without risks the stock may be heavily shorted for good reason such as a dismal future outlook active traders will monitor highly shorted stocks and watch for them to start rising if the price begins to pick up momentum the trader jumps in to buy trying to catch what could be a short squeeze and a significant move higher there are many examples of stocks that moved higher after they had a heavy short interest but there are also many heavily shorted stocks that then keep falling in price a heavy short interest does not mean that the price will rise it means that many people believe it will fall anyone who buys in hopes of a short squeeze should have other and better reasons to think that the price of the stock will go higher naked short selling vs short squeezenaked short selling is short selling a stock without first borrowing the asset from someone else it s the practice of selling short shares that have not been affirmatively determined to exist per the u s securities and exchange commission sec abusive naked short selling is illegal 3naked shorting still happens thanks to discrepancies between electronic and paper trading naked shorting can help exacerbate short squeezes by allowing for additional shorting that otherwise might not exist naked short selling is said to help balance the market that is naked shorting can force a price drop which leads to some share sales to cut losses allowing the market to effectively find balance example of a short squeezeconsider a hypothetical biotech company xyz which has a drug candidate in advanced clinical trials there is considerable skepticism among investors about whether this drug will actually work as a result there is heavy short interest in fact 5 million xyz shares have been sold short of its 25 million shares outstanding this means that the short interest in xyz is 20 and with daily trading volume averaging one million shares the short interest ratio is five the short interest ratio also called days to cover means that it will take five days for short sellers to buy back all xyz shares that have been sold short assume that because of the huge short interest xyz shares had declined from 15 a few months ago to 5 then the news comes out that xyz s drug works better than expected xyz s shares jump to 9 as speculators buy the stock and short sellers scramble to cover their short positions everyone who shorted the stock between 9 and 5 is now in a losing position those who sold short near 5 are facing the biggest losses and will be frantically looking to get out because they are losing 80 of their investment the stock opens at 9 but it will continue to rally for the next several days as the shorts continue to cover their positions and the rising price and positive news attract new buyers real world example gamestop short squeezea notable short squeeze occurred among traders and investors of gamestop corp gme during the months following the covid 19 pandemic with consumers locked down and stores often closed analysts and investors expected the company to potentially face bankruptcy because of a rise in competition and a decline in foot traffic at brick and mortar stores gme became a favorite target of short sellers the short interest had grown so dramatically that it amounted to more than 100 of the shares outstanding 4that led scion asset management s michael burry to develop a bull case for the company that it could return to profit in a couple of years instead of going bankrupt his thesis was published and repeated by reddit and youtube content creators midway through 2020 michael burry and chewy co founder ryan cohen also took a long position 5enough investors started buying the stock late in 2020 and the share price began to rise noticeably late in 2020 from there it was a snowball effect of retail investors buying stock and call options the price increase drove out some short sellers and attracted various big name investors and public figures such as elon musk and venture capitalist chamath palihapitiya 5gamestop s stock price surged due to a short squeeze on major hedge funds that were short the stock and forced to sell to cut losses the stock price went from less than 5 a share to 120 in just a month 64after the initial meme stock craze gamestop shares drifted steadily lower settling at just over 10 a share by the spring of 2024 however in mid may of that year the stock suddenly skyrocketed once again after keith gill also known as roaring kitty resurfaced on social media after a three year hiatus gill s cryptic posts on the platform x formerly twitter reignited interest in gamestop as well as other meme stocks leading to a massive surge in trading volume and price gamestop shares rose nearly 100 on tuesday may 14 2024 following a 74 increase the previous day 7 this sudden rally caught many investors and analysts by surprise as the company s fundamentals had not significantly improved since the initial meme stock frenzy in 2021 the resurgence of meme stocks in 2024 once again put pressure on short sellers who had re established bets against gme and other meme companies according to analytics firm s3 partners gamestop short sellers lost over 1 3 billion in the initial may 2024 squeeze with more losses on the horizon if the stock continues to pump 8while the renewed 2024 meme stock rally shared many similarities with the 2021 event some analysts questioned whether it would have the same lasting impact on the market and retail investor participation nonetheless the sudden resurgence of these stocks served as a reminder of the power of social media and retail investor sentiment in driving market trends 7 | |
what is days to cover and is it useful for identifying short squeeze targets | days to cover also known as the short interest ratio is calculated by taking a stock s total number of shares sold short and dividing that number by the stock s average daily trading volume for example if a stock has one million shares sold short and its average daily trading volume is 100 000 shares then the days to cover would be 10 days that is it would take 10 days for short sellers to cover their entire short position based on the average daily volume of shares traded in general the higher a stock s days to cover figure the more susceptible it may be to a short squeeze if days to cover for stock a and stock b are two days and 20 days respectively then stock b may be more vulnerable as a short squeeze target who loses and who benefits from a short squeeze speculators and traders who have short positions in a stock will face heavy losses if the stock undergoes a short squeeze contrarian investors who have built up long positions in the stock in anticipation of a short squeeze will benefit as the stock price climbs | |
where can i find information on stocks with high short interest | finance portals such as yahoo finance have free stock screeners that generate lists of heavily shorted stocks drilling down into individual stocks displays relevant short selling information such as the number of shares sold short and the short interest ratios for specific companies online resources like marketbeat provide useful short selling data such as the largest short interest positions changes in such positions over time and short interest ratio exchanges such as the new york stock exchange and the nasdaq also publish short interest data for the exchanges as a whole | |
what was the biggest short squeeze in history | during the 2008 financial crisis porsche automobile holding se poahy already a major holder of volkswagen ag vwagy shares increased its total stake in volkswagen to about 75 the state of lower saxony also owned more than 20 of the company leaving few remaining shares available to trade at a time when the stock was being heavily shorted 9 hedge funds and other short sellers were suddenly left in a tricky position as porsche s move meant that not all of them could cover their positions against this backdrop short sellers were forced to buy back the shares they sold which helped drive volkswagen s share price up to 999 10the bottom linea short squeeze can seemingly happen suddenly with price rising parabolically but often short squeezes are fueled by unusually high short interest in the underlying security when something happens which drives the price of the stock up the short sellers rush for the exits all at once attempting to buy to close their positions this adds fuel to the force propelling the stock price higher and irrationality sets in what happened to game stop s share price in 2021 is a good example of a short squeeze in action | |
what is short term debt | short term debt also called current liabilities is a firm s financial obligations that are expected to be paid off within a year it is listed under the current liabilities portion of the total liabilities section of a company s balance sheet investopedia madelyn goodnightunderstanding short term debtthere are usually two types of debt or liabilities that a company accrues financing and operating the former is the result of actions undertaken to raise funding to grow the business while the latter is the byproduct of obligations arising from normal business operations financing debt is normally considered to be long term debt in that it is has a maturity date longer than 12 months and is usually listed after the current liabilities portion in the total liabilities section of the balance sheet operating debt arises from the primary activities that are required to run a business such as accounts payable and is expected to be resolved within 12 months or within the current operating cycle of its accrual this is known as short term debt and is usually made up of short term bank loans taken out or commercial paper issued by a company the value of the short term debt account is very important when determining a company s performance simply put the higher the debt to equity ratio the greater the concern about company liquidity if the account is larger than the company s cash and cash equivalents this suggests that the company may be in poor financial health and does not have enough cash to pay off its impending obligations the most common measure of short term liquidity is the quick ratio which is integral in determining a company s credit rating that ultimately affects that company s ability to procure financing quick ratio current assets inventory current liabilitiestypes of short term debtthe first and often the most common type of short term debt is a company s short term bank loans these types of loans arise on a business s balance sheet when the company needs quick financing in order to fund working capital needs it s also known as a bank plug because a short term loan is often used to fill a gap between longer financing options another common type of short term debt is a company s accounts payable this liabilities account is used to track all outstanding payments due to outside vendors and stakeholders if a company purchases a piece of machinery for 10 000 on short term credit to be paid within 30 days the 10 000 is categorized among accounts payable commercial paper is an unsecured short term debt instrument issued by a corporation typically for the financing of accounts receivable inventories and meeting short term liabilities such as payroll maturities on commercial paper rarely range longer than 270 days commercial paper is usually issued at a discount from face value and reflects prevailing market interest rates and is useful because these liabilities do not need to be registered with the sec sometimes depending on the way in which employers pay their employees salaries and wages may be considered short term debt if for example an employee is paid on the 15th of the month for work performed in the previous period it would create a short term debt account for the owed wages until they are paid on the 15th lease payments can also sometimes be booked as short term debt most leases are considered long term debt but there are leases that are expected to be paid off within one year if a company for example signs a six month lease on an office space it would be considered short term debt finally taxes are sometimes categorized as short term debt if a company owes quarterly taxes that have yet to be paid it could be considered a short term liability and be categorized as short term debt | |
what are short term investments | short term investments also known as marketable securities or temporary investments are financial investments that can easily be converted to cash typically within five years many short term investments are sold or converted to cash after a period of only three 12 months some common examples of short term investments include cds money market accounts high yield savings accounts government bonds and treasury bills usually these investments are high quality and highly liquid assets or investment vehicles short term investments may also refer specifically to financial assets of a similar kind but with a few additional requirements that are owned by a company recorded in a separate account and listed in the current assets section of the corporate balance sheet short term investments in this context are investments that a company has made that are expected to be converted into cash within one year short term investments can be contrasted with long term investments investopedia michela buttignol | |
how short term investments work | the goal of a short term investment for both companies and individual or institutional investors is to protect capital while also generating a return similar to a treasury bill index fund or another similar benchmark companies in a strong cash position will have a short term investments account on their balance sheet as a result the company can afford to invest excess cash in stocks bonds or cash equivalents to earn higher interest than what would be earned from a normal savings account there are two basic requirements for a company to classify an investment as short term first it must be liquid like a stock listed on a major exchange that trades frequently or u s treasury bonds second the management must intend to sell the security within a relatively short period such as 12 months marketable debt securities aka short term paper that mature within a year or less such as u s treasury bills and commercial paper also count as short term investments 12marketable equity securities include investments in common and preferred stock marketable debt securities can include corporate bonds that is bonds issued by another company but they also need to have short maturity dates and should be actively traded to be considered liquid 3short term investments vs long term investmentsunlike long term investments which are designed to be bought and held for a period of at least a year short term investments are bought knowing they will be quickly sold 4 typically long term investors are willing to accept a higher level of volatility or risk with the idea that these bumps will eventually smooth out over a long period as long as of course the investment is growing in a positive trajectorylong term investments are also used by individuals that are able to stow away their money and don t have immediate needs for it such as to buy a car or a house 5advantages and disadvantages of short term investmentsshort term investments help ground an investor s portfolio although they typically offer lower rates of return compared to investing in an index fund over time they are highly liquid investments that give investors the flexibility of making money they can withdraw quickly if needed 1for a business long term investments are not counted as income until they are sold this means that companies that decide to hold or invest in short term investments count any fluctuations in price at the market rate this means short term investments that decline in value are marked down as a loss for the company on the income statement 67short term investment gains are reflected directly on the income statement short term investments take on lower risk making them stable options short term investments help diversify income types in case of market volatility short term investments typically have lower rates of return any declines in value of a short term investment will directly affect the net income of a business examples of short term investmentssome common short term investments and strategies used by corporations and individual investors include if you have excess cash using it to pay off higher interest debt may be more advantageous than investing it in low risk but low return short term investments 16real world example of short term investmentson its quarterly statement dated apr 21 2022 microsoft corp reported holding 92 2 billion of short term investments on its balance sheet the biggest component was u s government securities which was 78 4 billion this was followed by corporate notes bonds worth 11 7 billion mortgage asset backed securities at 590 million foreign government bonds worth 501 million municipal securities at 269 million and certificates of deposit cds at 2 billion 17 | |
what are the best short term investments | some of the best short term investment options include short dated cds money market accounts high yield savings accounts government bonds and treasury bills check their current interest rates or rates of return to discover which is best for you | |
where can i invest for 6 months | common short term investment vehicles include six month cds money market accounts high yield savings accounts government bonds and treasury bills 1 | |
what is the best way to invest 5 000 | based on experience and risk tolerance investors will differ on this question however many financial analysts will say the best way to invest 5 000 is to put it in a mutual fund or exchange traded fund that tracks the s p 500 and keep it for the long run | |
what can you invest in with little money | individuals with only a little bit of cash have a lot of options they can put the money in any investments that don t require a minimum balance such as certain savings accounts fractional shares of an index fund or even cheaper stocks bonds and cds the bottom lineshort term investments can be great investments for individual investors and corporations who are looking for both liquid and stable options to grow their wealth the options are plenty from cds to bonds and high yield savings accounts it s only up to each investor to do their homework | |
what is a shortfall | a shortfall is an amount by which a financial obligation or liability exceeds the required amount of cash that is available a shortfall can be temporary arising out of a unique set of circumstances or it can be persistent in which case it may indicate poor financial management practices regardless of the nature of a shortfall it is a significant concern for a company and is usually corrected promptly through short term loans or equity injections understanding a shortfalla shortfall can refer to a current situation as well as one predicted for the future a shortfall applies to any situation where the level of funds required to meet an obligation is not available shortfalls can occur in the business arena as well as for individuals temporary shortfalls often occur in response to an unexpected event while long term shortfalls may be related to overall business operations consumers all face shortfalls when they do not have enough funds to pay for things like groceries or bills credit or debit card overdraft protection is one way to deal with short term consumer shortfalls types of shortfallsa temporary shortfall for a small company may arise when an equipment failure at its production facility impedes output and results in lower revenues in a particular month in this case the company may resort to short term borrowing to meet payroll and other operating expenses often once the issue that led to the shortfall is corrected business operations return to normal and the shortfall is no longer a concern in the consumer market an escrow shortfall may occur when the amount of funds deposited into the escrow account often paid along with a mortgage payment fail to meet the obligations associated with the escrow funds such as property taxes or homeowner s insurance in these cases consumers are notified of the shortfall and may be presented with the option of paying the entire amount at once or by increasing the monthly charge associated with their mortgage payment to cover the difference a typical long term shortfall is the pension shortfall faced by many organizations whose pension obligations exceed the returns they can generate from their pension assets this situation generally occurs when returns from equity markets are well below average if a retirement fund is considered underfunded it is critical to rectify the shortfall if the contribution rate is not raised it can result in an increase in the shortfall in the pension account that may be difficult to remedy later in response to a shortfall threat government officials can propose possible solutions such as raising revenue through new taxes or redirecting funds from cuts in other areas to attempt to bring a fund up to a sustainable level shortfall risk mitigationshortfall risk can be mitigated using efficient hedging strategies which aim to offer protection from adverse price movements as an example resource companies often sell part of their future output in the forward market especially if they are expecting to incur substantial capital expenditures in the future such hedging helps to ensure that the finances required for a future financial obligation are available real world exampleas of july 2020 the new jersey pension fund for public workers is severely underfunded the fund has approximately 35 billion in liabilities and a little over 23 billion in assets to cover the obligations which is a shortfall of approximately 34 the pension covers over 295 000 active and retired workers 1 the pension is considered to be the worst managed in the country and despite increased contributions the fund remains in shortfall reasons for the shortfall include a reduction in the rate of return and increased member life expectancy that being said actuaries claim that the state is not nearly contributing enough to close the shortfall | |
what is shrinkage | shrinkage is the loss of inventory that can be attributed to factors such as employee theft shoplifting administrative error vendor fraud damage and cashier error shrinkage is the difference between recorded inventory on a company s balance sheet and its actual inventory this concept is a key problem for retailers as it results in the loss of inventory which ultimately means loss of profits | |
why is understanding shrinkage important | shrinkage is the difference between the recorded book inventory and the actual physical inventory book inventory uses the dollar value to track the exact amount of inventory that should be on hand for a retailer when a retailer receives a product to sell it records the dollar value of the inventory on its balance sheet as a current asset for example if a retailer accepts 1 million of product then the inventory account increases by 1 million every time an item is sold the inventory account is reduced by the cost of the product and revenue is recorded for the amount of the sale however inventory is often lost due to any number of reasons causing a discrepancy between the book inventory and the physical inventory the difference between these two inventory types is shrinkage in the example above the book inventory is 1 million but if the retailer checks the physical inventory and realizes it is 900 000 then a certain part of the inventory is lost and the shrinkage is 100 000 | |
what is the impact of shrinkage | the largest impact of shrinkage is a loss of profits this is especially negative in retail environments where businesses operate on low margins and high volumes meaning that retailers have to sell a large amount of product to make a profit if a retailer loses inventory through shrinkage it cannot recoup the cost of the inventory itself as there is no inventory to sell or inventory to return which trickles down to decrease the bottom line shrinkage is a part of every retail company s reality and some businesses try to cover the potential decrease in profits by increasing the price of available products to account for the losses in inventory these increased prices are passed on to the consumer who is required to bear the burden for theft and inefficiencies that might cause a loss of product if a consumer is price sensitive then shrinkage decreases a company s consumer base causing them to look elsewhere for similar goods in addition shrinkage can increase a company s costs in other areas for example retailers would have to invest heavily in additional security whether that investment is in security guards technology or other essentials to prevent shrinkage that was caused by theft these costs work to further reduce profits or to increase prices if the expenses are passed on to the customer | |
what are the causes of shrinkage | shrinkage is caused from the loss of inventory due to shoplifting administrative error employee theft vendor fraud and broken items among other reasons | |
how do you control shrinkage | to help prevent shrinkage businesses can conduct inventory audits install surveillance cameras thoroughly review vendors and set up theft prevention training for employees | |
how is shrinkage calculated in retail | to calculate shrinkage in a retail store you would look at the book inventory which represents the inventory received and should be present in the store and then subtract the actual amount of inventory which is the amount of goods that are physically in the store | |
how much is lost to shrinkage annually | according to a study from the national retail foundation retail businesses lost 62 billion from shrink in 2019 amounting to an average of 1 6 of sales 1 | |
what are retailers prioritizing to reduce risk of loss | nearly 30 of retailers reported that ecommerce crime has become a much higher priority over the last five years followed by organized retail crime orc 28 and internal theft 20 2the bottom lineshrinkage is the loss of inventory or cash from a business due to factors such as theft damage or administrative errors shrinkage can have a significant impact on a company s bottom line as it reduces profits and can lead to cash flow problems businesses should take proactive measures to minimize shrinkage such as implementing security measures conducting regular inventory audits and training employees on proper procedures while some degree of shrinkage is inevitable businesses that effectively manage shrinkage can improve their financial performance and remain competitive | |
what is a shutdown point | a shutdown point is a level of operations at which a company experiences no benefit for continuing operations and therefore decides to shut down temporarily or in some cases permanently it results from the combination of output and price where the company earns just enough revenue to cover its total variable costs the shutdown point denotes the exact moment when a company s marginal revenue is equal to its variable marginal costs in other words it occurs when the marginal profit becomes negative | |
how the shutdown point works | at the shutdown point there is no economic benefit to continuing production if an additional loss occurs either through a rise in variable costs or a fall in revenue the cost of operating will outweigh the revenue at that point shutting down operations is more practical than continuing if the reverse occurs continuing production is more practical if a company can produce revenues greater or equal to its total variable costs it can use the additional revenues to pay down its fixed costs assuming fixed costs such as lease contracts or other lengthy obligations will still be incurred when the firm shuts down when a company can earn a positive contribution margin it should remain in operation despite an overall marginal loss a shutdown point can apply to all of the operations a business participates in or just a portion of its operations special considerationsthe shutdown point does not include an analysis of fixed costs in its determination it is based entirely on determining at what point the marginal costs associated with operation exceed the revenue being generated by those operations certain seasonal businesses such as christmas tree farmers may shut down almost entirely during the off season while fixed costs remain during the shutdown variable costs can be eliminated fixed costs are the costs that remain regardless of what operations are taking place this can include payments to maintain the rights to the facility such as rent or mortgage payments along with any minimum utilities that must be maintained minimum staffing costs are considered fixed if a certain number of employees must be maintained even when operations cease variable costs are more closely tied to actual operations this can include but is not limited to employee wages for those whose positions are tied directly to production certain utility costs or the cost of the materials required for production types of shutdown pointsthe length of a shutdown may be temporary or permanent depending on the nature of the economic conditions leading to the shutdown for non seasonal goods an economic recession may reduce demand from consumers forcing a temporary shutdown in full or in part until the economy recovers other times demand dries up completely due to changing consumer preferences or technological change for instance nobody produces cathode ray tube crt televisions or computer monitors any longer and it would be a losing prospect to open a factory these days to produce them other businesses may experience fluctuations or produce some goods year round while others are only produced seasonally for example cadbury chocolate bars are produced year round while cadbury cream eggs are considered a seasonal product the main operations focused on the chocolate bars may remain operational year round while the cream egg operations may go through periods of a shutdown during the off season | |
when cash flow is tight several different types of personal loan offer a possible solution signature loans offer the best terms they only require your signature as collateral and typically offer more attractive rates than other types of unsecured debt | explore the ins and outs of signature loans and decide if one is right for you | |
what is a signature loan | a signature loan also known as a good faith loan or character loan is a type of personal loan offered by banks and other finance companies that only requires the borrower s signature and a promise to pay rather than physical collateral such as a car title or a home a signature loan can typically be used for any purpose that the borrower chooses interest rates may be higher than other forms of credit due to the lack of collateral but may be lower than other forms of unsecured credit such as credit cards 1 | |
how a signature loan works | to determine whether to grant a signature loan a lender typically looks for a solid credit history and sufficient income to repay the loan in some cases the lender may require a co signer on the loan but the co signer is only called upon in the event that the original lender defaults on payments signature loans are one type of unsecured term loan unsecured refers to the fact that these loans are not secured by any form of physical collateral unlike home mortgages and car loans term means the loan is amortized over a predetermined time period and paid off in equal monthly installments signature loan vs revolving creditapplications for regular credit or revolving credit loans normally trigger a funding delay while the banking institution or loan company examines the borrower s credit history and checks personal qualifications 2 by contrast the funds obtained through signature loans are deposited in the borrower s account more quickly allowing earlier allocation to financial needs as soon as a signature loan is paid off the account is closed and the borrower needs to apply for a new loan if they require additional funds in contrast a revolving credit account allows the indebted party to repay the loan and maintain the line of credit until the borrower or lender chooses to end the relationship and close the account examples of signature loansborrowers use signature loans for a range of purposes including home improvement unexpected expenses medical bills vacations and other large expenditures some borrowers also use signature loans to consolidate other debts adding a co signer on a signature loan may help a borrower with a minimal credit history or a low income let s say a borrower gets a signature loan with a 7 interest rate for an amount equal to the total of balances that they are carrying on credit cards with rates ranging from 12 to 20 the borrower then uses the signature loan to pay off the credit cards in full the borrower will realize distinct savings by repaying the same amount of money at 7 rather than at the former higher rates if you re thinking about taking out a signature loan then a personal loan calculator could be useful for figuring out what the monthly payment and total interest should be for the amount you re looking to borrow | |
how are signature loans different from personal loans | a signature loan is a type of personal loan it s different from other kinds of personal loans because it s unsecured the only collateral is the borrower s signature and a promise to pay who are signature loans typically good for borrowers with good credit are typically candidates for signature loans because they have established a record of paying debts and are a low risk for defaulting people with poor credit may still be able to secure a signature loan with the help of a co signer there are even some signature loans that don t require a credit check though these are often payday loans which typically have exorbitantly high interest rates | |
how much do people borrow with a signature loan | they can start at as little as 500 and go up to 50 000 3 however keep in mind that not all banks and credit unions offer signature loans the bottom linesignature loans are a type of personal loan requiring only a promise to pay as collateral while in the past they were typically made to people with poor credit today they are pretty much reserved for customers with better credit scores remember that not all banks offer signature loans and interest rates tend to be higher than with secured loans | |
what is a silent partner | a silent partner is an individual whose involvement in a partnership is limited to providing capital to the business a silent partner is seldom involved in the partnership s daily operations and does not generally participate in management meetings silent partners are also known as limited partners since their liability is typically limited to the amount invested in the partnership apart from providing capital an effective silent partner can benefit an enterprise by giving guidance when solicited providing business contacts to develop the business and stepping in for mediation when a dispute arises between other partners | |
how silent partners work | as with other partnership agreements a silent partnership generally calls for a formal agreement in writing before forming a silent partnership the business must be registered either as a general partnership or a limited liability partnership llp per state regulations all parties will be responsible for ensuring that the business s financial obligations are met including any general expenses or applicable taxes except those that are exempt if the partnership is formed as part of a limited liability company llc a partnership agreement designates which parties are general partners or silent partners this serves as an outline to which functions both financial and operational the general partner will perform as well as the financial obligations that are assumed by the silent partner additionally it includes the earnings percentage due to each partner in regard to business profits silent partners are liable for any losses up to their invested capital amount as well as any liability they have assumed as part of the creation of the business participating as a silent partner is a suitable form of investment for those who want to have a stake in a growing business without exposing themselves to unlimited liability contracts should include terms for buying out the ownership stake held by a silent partner or otherwise dissolving the partnership an entrepreneur starting a business might welcome the capital provided by a silent partner when getting their business off the ground however if the business becomes successful it may become preferable to buy out the silent partner rather than share profits long term buyout terms in a contract should address the possibility of an outside investor buying out a silent partner also a silent partner might wish to dissolve a contract after a certain period if they determine the business is unlikely to become profitable however the contract is structured the silent partner will expect a certain minimum return on investment if the business becomes profitable their risk will likely also be limited to no more than the capital invested | |
how does a silent partner compare to a general partner | regardless of the aforementioned usual roles of a silent partner giving guidance when solicited providing business contacts to develop the business and mediating a dispute between other partners it is considered a background role that cedes control to the general partner this requires the silent partner to have full confidence in the general partner s ability to grow the business the silent partner also may need to ensure that their management styles or corporate visions are compatible advantages and disadvantages of a silent partneradvantages of being a silent partner include having less responsibility and time commitment to the business an opportunity for passive income through their investment and having limited liability the silent partner may also have little to no knowledge of the company or even the industry in which it operates since they have no involvement in the business operations 12all of these can lead to financial gain without active engagement in the business disadvantages of being a silent partner include losing their investment having no influence or control over business decisions and potential disagreements or incompatibility that could harm the partnership there is also legal risk but silent partners are often immune to legal actions taken against the firm and its management because they are hands off partners 12a potential silent partner should consider all these factors before proceeding less responsibility and time commitment to the businesspassive incomelimited liabilitylosing their investmenthaving no influence or control over business decisionspotential disagreements or incompatibility | |
what is the difference between a silent partner and a general partner | the silent partner takes a background role that cedes control to the general partner the silent partner must have full confidence in the general partner s ability to grow the business the silent partner may need to ensure that their management style or corporate vision is compatible with that of the general partner | |
what should a silent partnership have formalized | a silent partnership should have a formal agreement preferably in writing that includes the bottom linea silent partner is an individual in a business partnership whose involvement is limited to providing capital the silent partner is rarely involved in the partnership s daily operations and does not generally participate in management meetings a silent partner is also known as a limited partner this is because their liability is typically limited to the amount they invested in the partnership |
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