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What does it mean for a bank to be net long or net short for a stock?

is this specifically related to IPOs or is it more generic?

May 22, 2012 by Savita from Nampa, ID in  |  Flag
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This is a generic answer for net long and net short. Long means an entity owns the stock, say a 100 shares. If another division within the entity sells 50 shares short (shares they do not own but have to borrow), the overall entity is net long 50 shares (100 owned less 50 sold short). If instead 200 shares were sold short, the overall entity would be net short 100 shares (100 owned less 200 sold short).

Comment   |  Flag   |  May 22, 2012 from Ridgefield, CT

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Thomas Jensen Level 16

It is not specific to IPOs. Long means the bank owns shares on account. Short means the bank has BORROWED shares and sold them in the market (i.e. they have to buy them back at some point to sloce the gap). "Net" is the difference between the two - i.e. to be net short is to OWE the market shares of a stock.

Comment   |  Flag   |  May 22, 2012 from Portland, OR

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George Cones, JD Level 20

Savita, Your question about long and short positions is timely, because today you will find many investments, even mutual funds, that have long-short positions. Many of these investments are managed by very experienced and capable managers, but understand that even in the most capable hands, these long-short positions have risks.

Most investors are familiar with long positions. We buy a stock or a mutual fund and watch it to go up (or down). This is a long position. If we buy the stock or mutual fund for $50 the stock may go up or down. Worst case scenario, the company goes bankrupt, the stock goes to zero, and we lose or $50 investment.

Short positions, on the other hand are less familiar to most investors. When we sell a stock short, we are selling a stock that we don’t own. If we sell a stock for $50 and the stock goes to zero, we can make $50 (we are omitting some of the market rules and additional costs relative to short selling for purposes of illustration). If the stock goes up, say to $200, we can lose $200, because at some point we will be required to buy the stock for delivery to the purchaser. As you can see, the risk of loss as a short position, unlike a long position – which is 100% of our investment) is theoretically unlimited.

To illustrate the concept of net positions (your original question – which you probably never thought I would get to), lets construct a 130/30 portfolio, that is a portfolio that is 130% long, and 30% short. How is that possible? We have $10,000 to invest. We sell short a stock or basket of stocks worth $3,000. Now we have $13,000 ($10,000 our original amount and $3,000 from our short sale). We by a stock, or basket of stocks in the normal way in the amount of $13,000 Long. So, for our $10,000 original investment, we have a portfolio that is 130% long ($13,000) and 30% short ($3,000). Many salespeople for funds that have such a portfolio would tell you have a net 100% portfolio. That is true.

But here is the rub, and this is what you are not often told (except in the bowels of the Prospectus), this kind of portfolio has 160% exposure. If we buy a stock long we (or the fund manager) are betting the stock will go up. If we sell a stock or basket of stocks short, in essence we (or the fund manager) are betting the stock will go down. If we are right we make money of both bets. If the stock we bought long go down and the stocks we sold short go up? If we are wrong on both bets we can lose serious amounts of money, much more than a dull, stodgy long position.

We would call this a form of leverage, and there are all sorts of ways to create hedges or increase risk, such as: individual securities, ETFs, mutual funds, futures, options, or forward contracts (to name a few).

Comment   |  Flag   |  May 23, 2012 from Wilmington, DE

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