Page 246 - THE MARKET WHISPERER

242 PART 8 - Shorts: Profit From Price Drops
Example of Short Sale of Checkpoint, CHKP

Checkpoint sank below the line of support at $35. Let’s say I want to sell
100 shares short, and I press the short button at [1]. What happens? I have
just sold 100 stocks I don’t have!

How can I do that? Very simply, because my broker loaned them to me.
How does my broker have 100 Checkpoint shares? The broker manages
the accounts of multiple clients. Since Checkpoint is a high-volume stock, it
is reasonable to assume that some of the broker’s clients hold Checkpoint
shares.

Now let us say that one of the broker’s clients, a fellow named David,
holds 300 Checkpoint shares in his account. David bought them two years
ago, and believes in their long-term future. When I pressed the short
sale button, the broker took 100 of David’s shares and sold them for me
according to my instructions.

In actuality, I sold 100 authentic shares, but they are not mine. If David
were to suddenly check his account, would he find 300 or 200 shares?
Since no one bothered to update David that I sold 100 shares belonging
to him, David still thinks he has 300 in his account, even though in reality
there are only 200. What would happen if David decided to sell all 300,
right then? The broker would simply shift 100 from someone else. Legal?
Absolutely.

In one of the conferences where I taught, a young woman raised her
hand and said in all seriousness that she felt the system of selling short