In two previous entries, I discussed the lure of stocks and why people were unjustifably invested in what can only be called "phantom money". The example was given of Joe Schmoe who seemingly lost over $174,000 but the bulk of that ($139,000) didn't even exist as hands-on cash, but as inflated share value. When the "money" was lost, Schmoe didn't actually "lose" anythng real - only the hard money he actually used to purchase shares.
The winners of the stock game, then, are precisely those able to "time the market" and cash out while most are still in. In this way they can reap real rewards, meaning converting the phantom money on paper into real money in the bank, given there are many more "buy and hold" investors to support the cashout.
Thus, like many recent scams in the news (Bernie Madoff, Shawn Merriman etc.), the stock market is also a giant Ponzi scheme, in which the lucky few who time out on the high share end benefit from those buying in (violating the buy low - sell high mandate) and other who simply have surrendered to the "buy and hold" mantra - hoping for some magical stock redemption windfall just before retirement.
But wait, apart from phantom money another financial shark lurks in the backwaters of Wall Street! It is none other than the "naked short seller"! These denizens have the ability to purchase shares they don't really own, then drive stock prices down by betting on their demise.
These "traders" - if they can be called that - typically bet against certain stocks by borrowing money from a brokerage then using it to bet against the stock's shares, forcing the selling of millions of shares they themselves don't own (And you thought phantom money was bad!) This selling of shares not truly owned is known in the Wall Street parlance as "naked short selling").
As a result of it done en masse (to targeted stocks) stock share value plummets, and the long term investors lose even more money (Okay, at least their paper money!). Look at what has transpired with the big banks such as Citibank the past few months.
The short seller game is simple: Borrow money to buy shares of what is perceived as a weak stock, then sell the borrowed money shares betting they can be replaced with shares bought at a lower price.
Thus, Company XYZ sells shares at say, $10 each, and a short seller borrows 100,000 shares, thus $1 million worth on paper. He then unloads all those shares on the market, bringing down the share price precipitously, since obviously that much selling will have a negative, or downside effect. All the other investors who are legit then lose.
As the share price plummets, to let's say $5 a share- when he clocks out, the short seller has effectively made $500,000 [($10 - $5) x 100,000 shares).] Since the share price of XYZ has collapsed, in effect, then the actual money owed for the borrowed shares is now only $500,000. The short seller pays back the borrowee the half mil, then keeps the half mil from his trickery. Meanwhile, millions of proper investors hoping to pay for Janie's college or Pop's retirement get shorted.
The effect is even more pernicious with naked short sellers who bet against stocks to depress prices by selling millions of shares they have not even borrowed. Thus can they wreak unmitigated havoc on stock share prices while the legitimate holders remain blissfully unaware. Critics have rightfully pointed out that - via the assistance of brokerages - these short sellers incept delivery failures by shorting stocks without first borrowing shares, thereby flouting securities law.
Thankfully, the future of this aspect of the stock shllling game may at least be soon over. The SEC (Securities and Exchange Commission) has begun at last to stymie the ability of short sellers to depress stock share prices by using money to sell millions of shares they don't actually own. Part of this stymie ability will likely include reinstatement of the "uptick rule". Until 2007 that rule had required short sellers to wait for a rise or "uptick" in a stock's share price before betting on its decline.
Finally, some sanity is evidently going to return but not in time for the many millions who have lost half or more of their money (okay, phantom money) in the Maul Street Casino.