Benefiting From Falling Markets and (or) Shares

[SpecNomics]

I seem not to be getting any response re the question of whether Brokers/Finance House/Fund Managers in Nigeria offer Stocklending Services, why this is the case I do not exactly know, but one reason I am considering is that we do not understand the concept of Stocklending, its benefits and drawbacks. I have taken it upon myself to explain this as best as I can, so that we can convince our brokers to start if they do not already offer the service or to start employing it if they do and we did not understand it thus we stayed away!

BEing a speculator I want to get paid in a rising or falling market, I just want to be paid for making an educated guess, period!!! When a market is rising, getting paid is a straight foward affair, you buy as the price rise and sell when a positive return is made. But when a market is falling, most of us would simply cut our losses, seek refuge in holding cash, and wait till calmer times.

However if brokers offered Stocklending services, we'll not have to wait on the sidelines, especially if we guessed that the line of least resistance for a given share or market was downward. We'll attend our brokers let him know we want to borrow the stock for say 1 month, pay him(er) a fee for borrowing the stock, promising to return the stock at the end of the loan term, and paying any dividend paid during that period to the broker. Once we borrow this stock say ZB, we would sell it in the market; our expectation is that ZB would fall so we expect to buy it at a cheaper price in 1 months time when we have to return the stock back to our broker. Its the difference between the price we sell at and buy at that our profit is made, as always. The beniefit is apparent, we make money from a falling stock, the broker/finance house/fund manager makes money from fees. The drawback is that your expectation are not met and the price rises instead, you'll still have to buyback to return the stock borrowed, and we know, price can rise, theoretically, infinetly, thus losses can be exponential.

This is common practise in developed markets, and was already being used in 19th century american financial markets so I can't see it being difficult to implement in Nigeria.

This crossed my mind because of the delays investors face in waiting for their share certs. If you could borrow stock, you'll have borrowed FBN stock from a broker, sold it to lock in that N57 high, and then when your certs are issued and you can trade simply use this to repay the stocks you borrowed effectively selling at N57 and buying at N33.

Pls find out if your brokers offer these services, and let us know back here in the forum. Thanks a lot.

[c kenneths]

The book that treated a bit of this situation is Rich dad poor dad by Kiyosaki, he called it puts, options, calls etc. and I call them market derivatives, however the Nigerian market has not started to offer these services.

When some people pushed for this last yr, the NSE blocked the move, said our market is still too young for this. They fear that experienced investors will use this to turn this young market on its head.

Am still trying to measure the impact this will have in our market, the profitability, shares availability, speculations as we know it now, and general index position.

[SpecNomics]

Thanks CK, but Stocklending is quite different from derivatives such has options and futures. Their apprehension is totally understood in relation to these latter products.

Stocklending can not have any negative impact because once stock is borrowed and sold the share changes hand to a new owner, the individual borrowing stock has to buy the stock back to pay lender. So the situation can not arise, with Stocklending as it would with Derivative products, of total value of outstanding contracts being more than the underlying stock. This is important because it means that where the contract was to be held to expiry the holder of short position would need more stock than is available to meet their delivery expectations. With Stocklending this can not arise, has the total outstanding share would still remain thesame.

This why I do not see the difficulty of implementing Stocklending.

[c kenneths]

@Specnomics, didnt they say this is what caused the stock market crash of 1929 in the US, where traders that borrowed stocks were caught pants down when prices started to tumble, so they rushed out and borrowed from banks to replace the stocks, and cover their butts and this even caused more panic selling among traders.

In the end prices went so low that banks started to raise their interest rates to stem the tide of borrowers, all to no avail, some ended up flat broke, some jumped out of skyscrapers, and dont ask me if he survived.

Was it not the stock lending that caused 1929 in NYSE?

Explain for us the negatives, cause no policy can come without its downsides.

[SpecNomics]

Naked Shorts means an indiviadual has bet on a stock going down without actually owning the stock, this would be the case when derivatives are used as explained ealier i.e. nos of shares "naked shorted" is greater than total o/s. This is a downside because when these bears have to fulfill their obligations of buying back to close their position, there are not enough shares to satisfy demand, which should logically led to increase in price not a further fall. This is not to say this is good, as it can led to financial instability as brokers and finance houses could record big losses.

That the bears caused the NYSE crash in 1929 is ludicrous, if speculators were short, then they must have been for good reason, and that prices continued to fall means the general macroeconomic condition was not favourable, for if it was many people would have found that the could buy loads of underpriced shares.

Back in those days, there was a lot of inside manipulation of shares, and when they fell they blamed it on the bears. Meanwhile it was they who mispresented financial information, when the bears knew very well that stocks was for the selling. These insiders borrowed funds to support their stock against the trend of worsening macroeconomics in hope of making prices rise so they could rid themselves of their own holding to the sucker public, no one was buying this, thus the selling continued against this, and these insiders were owing there banker loads of money. So to payback the loans, they too had to sell, thus worsening the situation. I am not saying I do not support the need for financial stability, but if you bet wrong, you must pay for it!!!

So contrary to what you explain, it was those pushing a bull market in bear conditions that led to the crash not the bears or those short selling stock.

[olusolakemmy]

reallydont understand, how this stocklending works.
how you buy high and sell low.
please can someone explain

[c kenneths]

@ Olusolakemmy, I also dont understand fully how this works, and more explanations will be needed here to get it down to the non MBA holders in this forum.

And if we do not understand here, how much more the lay man walking the streets who still havn't learned the a b c of 'what is a stock market'

[olusolakemmy]

Originally Posted by c kenneths

@ Olusolakemmy, I also dont understand fully how this works, and more explanations will be needed here to get it down to the non MBA holders in this forum.

And if we do not understand here, how much more the lay man walking the streets who still havn't learned the a b c of 'what is a stock market'

ok, i hope specnomics will help, he started it gist, am sure he will have lots of explanation on it.

[RethinK2.0]

@spenomics

Stocklending...selling short and their whole family requires a very efficient credit system which naija doesn't have yet o because theoretically, you can lose more than you invest
Also Buffet called this things financial weapons of mass destruction as they stimulate huge speculative never-seen-before-greed...and a lot of pple eventually get burnt.

But if you have a fail-safe-formula, i dun mind to become your apprentice

[Soweto]

Originally Posted by RethinK2.0

@spenomics

Stocklending...selling short and their whole family requires a very efficient credit system which naija doesn't have yet o because theoretically, you can lose more than you invest
Also Buffet called this things financial weapons of mass destruction as they stimulate huge speculative never-seen-before-greed...and a lot of pple eventually get burnt.

But if you have a fail-safe-formula, i dun mind to become your apprentice

I dont think nigeria is ready for those highly geared products like stocklending,single stock futures,options,warrants and instalments etc where you can make or loose money in a rising or falling markets . these are common product oversees because they have got what it takes to carry out those transactions. Nse will have to improve with their infrastructure b4 thinking of those products. Do you think there is any advance market where traders trade for less than five hours? but NSE trades less than that?.

We will get there When an ordinary man on the street starts trading with live prices on their pc like those in advance coutries,maybe we can start thing of those products.

[Curious]

In simple terms,
Person A has a long view on a stock and plans to hold for a few years
Person B has a different view and believes the stock is overpriced and will therefore come down in price in the near term. 'A' then agrees to loan his shares to 'B' for a price (say 5% p.a). After loaning from 'A' to 'B', 'B' sells the stock and if the stock goes down, 'B' buys back at a lower price, returns the stock to 'A' having paid the loan value over the period. Now this is a good thing for 'B' seeing that he's made money and is also a good thing for 'A' seeing that he's added value to his bottom line afterall he has a long view and wont sell anyway.

Stock lending requires quite a lot of back end infrastructure which we don't have in Nigeria the least of which is a credit system. Also, prime brokers, lending traders, custodians etc are often needed but these help speed up and smoothen the process rather than being absolutely necessary. I don't think Nigeria is quite ready for stock lending, the market needs to be far more efficient first. This whole thing of suspending stocks for months on end simply because they're having a corporate action needs to go.

[windywendy]

Originally Posted by SpecNomics

I seem not to be getting any response re the question of whether Brokers/Finance House/Fund Managers in Nigeria offer Stocklending Services, why this is the case I do not exactly know, but one reason I am considering is that we do not understand the concept of Stocklending, its benefits and drawbacks. I have taken it upon myself to explain this as best as I can, so that we can convince our brokers to start if they do not already offer the service or to start employing it if they do and we did not understand it thus we stayed away!

BEing a speculator I want to get paid in a rising or falling market, I just want to be paid for making an educated guess, period!!! When a market is rising, getting paid is a straight foward affair, you buy as the price rise and sell when a positive return is made. But when a market is falling, most of us would simply cut our losses, seek refuge in holding cash, and wait till calmer times.

However if brokers offered Stocklending services, we'll not have to wait on the sidelines, especially if we guessed that the line of least resistance for a given share or market was downward. We'll attend our brokers let him know we want to borrow the stock for say 1 month, pay him(er) a fee for borrowing the stock, promising to return the stock at the end of the loan term, and paying any dividend paid during that period to the broker. Once we borrow this stock say ZB, we would sell it in the market; our expectation is that ZB would fall so we expect to buy it at a cheaper price in 1 months time when we have to return the stock back to our broker. Its the difference between the price we sell at and buy at that our profit is made, as always. The beniefit is apparent, we make money from a falling stock, the broker/finance house/fund manager makes money from fees. The drawback is that your expectation are not met and the price rises instead, you'll still have to buyback to return the stock borrowed, and we know, price can rise, theoretically, infinetly, thus losses can be exponential.

This is common practise in developed markets, and was already being used in 19th century american financial markets so I can't see it being difficult to implement in Nigeria.

This crossed my mind because of the delays investors face in waiting for their share certs. If you could borrow stock, you'll have borrowed FBN stock from a broker, sold it to lock in that N57 high, and then when your certs are issued and you can trade simply use this to repay the stocks you borrowed effectively selling at N57 and buying at N33.

Pls find out if your brokers offer these services, and let us know back here in the forum. Thanks a lot.

What you're referring to here is short-selling i.e. selling a stock which you do not own, with the hope of buying it back at a cheaper price. It's quite risky and therefore very heavily regulated in developed markets. Not too sure Nigeria is ready for it yet -- at least until our securities laws and the regulators are able to put their act in order. It would be a wonderful idea though if it were introduced

[windywendy]

Originally Posted by Curious

Stock lending requires quite a lot of back end infrastructure which we don't have in Nigeria the least of which is a credit system. Also, prime brokers, lending traders, custodians etc are often needed but these help speed up and smoothen the process rather than being absolutely necessary. I don't think Nigeria is quite ready for stock lending, the market needs to be far more efficient first. This whole thing of suspending stocks for months on end simply because they're having a corporate action needs to go.

My sentiments exactly.

[Curious]

Originally Posted by windywendy

My sentiments exactly.

well if we're being quite particular, then you're correct I am talking about short selling but I felt it necessary to provide a complete answer to the questions raised which included concepts of stock lending as well as short selling.

[windywendy]

Originally Posted by Curious

well if we're being quite particular, then you're correct I am talking about short selling but I felt it necessary to provide a complete answer to the questions raised which included concepts of stock lending as well as short selling.

Isn't stock lending the same as short selling -- i.e. the investor borrows stocks that he believes are overvalued, sells them at the overvalued price, buys them back when the price falls and returns the stocks back to the broker he borrowed them from.