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Taking Stock: Countess Dracula short-sells a stock

Malcolm Berko: Selling short supports “Berko's 50/50-90 Rule” about investing: “If there's a 50/50 chance that two stocks will fall in price, there's a 90 percent chance that the one you pick won't.”
By Malcolm Berko Published: November 18, 2012
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Therefore, when BIO's Life Sciences runs out of product, its revenues and earnings will fall by 66.6 percent. BIO is keeping this news quiet, hoping its science team, that was dispatched to Transylvania after rumors compelled them to investigate the existence of a secret cache, will be successful.

Later, the Countess was informed, with certainty, that Vlad the Impaler destroyed the cache in the early 16th century.

Next, Countess Dracula called Franklin Stein, her broker at Lugosi, Karloff, Chaney & Price Securities and commanded him to sell-short 100 shares of BIO at $105. Because LKC&P Securities didn't have 100 shares of BIO, they borrow the shares electronically from another client, selling them on the NYSE at $105, which results in a $10,500 credit to the Countess's account.

Several weeks later, the science team trudges back from Transylvania. BIO issues a report to CNN that it can no longer produce this profitable product and within a fortnight, its shares fall like a stone to $55 a share.

At this point Countess Dracula calls her broker, Franklin Stein and commands him to buy back the stock. This is known as “covering the short position.” Franklin Stein purchases 100 shares of BIO using $5,500 from the $10,500 credit in the Countess's account. The 100-share certificate is electronically returned to its owner. Countess Dracula then keep the difference between the sales price $10,500 and the repurchase price $5,500 which becomes a bloodless profit of $5,000. This same technique can be used for bicycles, artichokes, eggplants, bunny burgers or season's tickets to the Detroit Lions.

A short sale is no more speculative than buying a stock (in the vernacular buying a stock is called “going long”). However, selling short supports “Berko's 50/50-90 Rule” about investing: “If there's a 50/50 chance that two stocks will fall in price, there's a 90 percent chance that the one you pick won't.”