Introduction: Short selling has become a major topic in the news in recent years. Both the Game-Stop Wall-Street-Bets controversy and the Silicon Valley Bank Collapse created unprecedented displays for the public. Average citizens are beginning to take interest in the financial system. In this article we will break down the process of short selling. and the ways in which certain market outcomes are somewhat guarantied.
Part One: Short Selling
Section 1: Short Selling Strategies
Short selling is a nuanced trading strategy that involves selling borrowed stocks with the anticipation that their value will decrease. Here’s a step-by-step breakdown:
- Borrowing Stock: Begin by contacting your broker to assess the availability of shares for short selling. Your broker will guide you through the borrowing process.
- Selling Borrowed Stock: Once shares are borrowed, sell them on the market at the prevailing price. The proceeds from this sale are held in your trading account.
- Monitoring the Trade: Keep a vigilant eye on the stock’s performance, aiming to repurchase shares at a lower price to close the position and generate profit.
- Buying Back the Shares: When you perceive a favorable market condition, repurchase the borrowed shares from the market.
- Returning Borrowed Shares: Complete the process by returning the borrowed shares to your broker, effectively closing the short sale.
Refer to Figure 1 for Silicon Valley Bank valuations before the March 2023 crash and Figure 2 for SVB stock price trends, including the crash.
Section 2: Treasury Bonds and the Impact of Interest Rates
Understanding the inverse relationship between interest rates and long-term Treasury bonds is crucial. The Silicon Valley Bank story is a shining example of the effects of monetary policy on financial markets. Here’s a concise breakdown:
- Coupon Payments: Long-term Treasury bonds provide fixed coupon payments to bondholders. When interest rates rise, existing bonds with lower coupon rates become less attractive, impacting their market value.
- Market Demand: Rising interest rates lead to higher returns on newly issued bonds, making existing bonds less appealing. This prompts investors to sell existing bonds, increasing supply and reducing demand, thereby decreasing bond prices.
Investing is inherently mathematical. While no investment is guaranteed, understanding a company’s fundamentals, market conditions, and sentiments can empower you to make informed decisions.
It’s essential to approach financial advice with caution. Poor incentives within the financial system often prioritize short-term gains over long-term stability, urging responsible decision-making.
The key takeaway is to be vigilant, educate yourself, and take responsibility for your financial decisions. Trusting one’s advice blindly, even mine, is discouraged. The financial landscape is complex, and thorough understanding is crucial.
If you ever wish to delve deeper into these concepts or discuss specific financial terms, I’m here to assist. Feel free to reach out, and we can navigate this financial landscape together.
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