On Buying And Selling
October 25, 2011 1 Comment
Some basics on buying and selling for folks still confusedly angry about that Goldman/Abacus deal. I’m going to go as slow as possible:
- In finance/investing, when you buy a thing, you have gone long that thing. Long means, if the thing does well, you do well, and vice versa.
- When you buy a thing, it stands to reason that someone sold it to you. I mean, you can’t very well have bought it if no one sold it to you, now can you?
- So we agree that somewhere out there is a person who sold the thing you just bought. Well. Just as you got long(er) when you bought the thing, the person that sold it to you got short(er). Automatically. See how that works?
- Short means: if the thing does well, they do badly (they might think: golly, should have kept it!), but if it does badly, they do well (they might think: thank goodness I sold it before it went down!).
- In other words: selling is shorting. Anyone who sells you anything, is going short that thing, by definition. It’s the same thing.
- All of the preceding is true whether we are talking about selling securities one already owns, naked shorting of securities one doesn’t own, or shorting via derivatives created out of thin air. In every such sale, the seller (of risk) gets shorter, and the buyer (of risk) gets longer, than they were at the start of the day. That’s what buying/selling means and, equivalently/interchangeably, that’s what going long/short means. There is simply no such thing as buying a financial instrument without making somebody somewhere shorter. If you bought it, someone else got shorter the same thing you just bought.
If you have read and absorbed the above, then you will understand how fundamentally stupid are criticisms such as, “But Goldman sold them something they were going short!” or “didn’t tell them someone was going short on the other side!” These complaints make about as much sense as complaining that a restaurant serving you an egg omelet “didn’t tell you” that eggs were used in the process. You should just kinda know from the fact that, at the end of the transaction, you ended up with an omelet, and because you’re not a moron. Are you?