Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 144

We already covered "buy to cover" in this section but just to repeat, a buy to cover order is used to cover (settle) a respective short position in your account. Remember that shorting is a margin transaction and as such there are requirements to be met before shorting. For example, you can only short marginable stocks, you are probably required to pay at least 50% of the value of the shorted stocks (think of this as collateral), and there is margin interest. Companies generally frown upon short-sellers who can sometimes drive down a stock's price dramatically. In some cases companies have gone as far as pleading with their shareholders to register their shares to their own names, thereby choking the available pool of unregistered shares that short-sellers can borrow from. Once the shares are registered to an owner's name, they can only be borrowed from the owner.

Bid And Ask

In any type of transaction there are two parties involved: those who are selling and those who are buying. Stocks are no exception. It is true that buyers and sellers in most cases don't know each other and the transactions are carried out through clearing houses, market makers, and specialists who deal with pools of available shares. Nevertheless at the heart of stock transactions, it is buyers and sellers who move the market. Remember that the stock market is pretty much one large auction market. In many auctions buyers and sellers don't know each other either. They deal with auctioneers who manage moving the merchandise and take a cut of the profits. The price action in the stock market pretty much follows the same rules of an auction. Prices are set based on the available shares in the pools (which fluctuate constantly as shares are offered, bought, and sold) and ultimately the old rule of supply and demand.


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