How Short Selling Works

How Short Selling a Stock Works: 

Whether you know it or not, the market maker's log books are safe from observation and inspection by anyone, including the SEC. That means that they can, and at times, do play games with a stock.

On this particular stock, as the stock was running up, the market makers began to short sell the stock. That simply means that they "borrow" stock to sell to buyers with the understanding that within three trading days, they must "buy" the stocks back to cover the amount of shares that they borrowed.

Why would they do this? Simple, because if they can borrow and sell a large block of shares, it stalls the momentum of a stock and drives the price down. Now, after this happens, they will try to get anyone still holding shares to sell them, at a loss, at bottom of the barrel prices. The lower the sell price, the more money these market makers make.

In other words, if they borrow 1 million shares and sell them at .01, then if they are able to buy them from "bag holders" at .003, then they have made over 200% profit.  It's like me saying to you,
"Let me borrow your shovel."  And I take your shovel and sell it to a man who really needs a shovel, and I am able to sell it to him for $10.  Then, I go everywhere and desperately try and find someone to sell me a new shovel for $3, when the going rate has been alot closer to $10.

This is what happened with CSLR, for example. If you noticed today, there was only a volume of 5100 shares traded on only one trade and it ran the pps price up to .0072. Why? It's because someone entered a sell order at .0072 and the market makers swung up to .0072 and picked up 5100 shares of it. It was a sell that drove the pps up to .0072. (But, also notice that the bid price never moved off of .003).

Folks, their game is to lure you to lower your sell order lower and lower and lose more and more of your money so that they can make more and more money. When you understand it like this, you understand that lowering your sell order is nothing different than handing that money straight to the market makers instead of waiting out the three days and making them buy back your shares at a price that you demand.

This is called a short squeeze, and that is exactly what is happening here.

Again, it's very unfortunate, but what an opportunity to learn a valuable lesson that will save you countless thousands of dollars throughout your trading career.

So, what do you do? Well, if you don't need your money, and you want to desperately get out of the trade at a fraction of your initial investment, then lower your sell order. Notice that they never moved off of the .003 bid price. They're telling us that .003 is as much as they're willing to pay right now. But, believe me, after three days, they'll be willing to pay whatever you "ask", because they are required to cover their short sales. So, my advice is to hold strong and make them raise the bid up to match your sell order price. You don't have to lose money on this trade. Trade it smart, wait it out and you will see this thing run again.

Bid = the highest anyone is willing to buy the stock for (the highest entered buy order)
Ask = the lowest anyone is willing to sell the stock for (the lowest entered sell order)

By keeping the bid at .003, they are sending us the message that they want to buy our shares up at .003.  Ridiculous!  And these little nibbles at .0072 or so are just to lure you into lowering your sell order out of fear that you won't be able to sell them at a higher price.  Get this, 5100 shares at .0072 amounted to about $37, folks.  It's a game. 

Here's what will typically happen: When the MM's begin to cover, it will show up as buys, because they have to buy the shares to pay back the shares they borrowed. And, as you should know, buy volume on a stock creates upward movement. If you keep your sell order high, then you will force the market makers to "buy" them back from you at the price you set. That's really how simple this works...

For example, if we keep our sell orders set at a minimum of .0072, then you will see the bid "magically" change to .0072 and buys coming in at that price... and then above, as the market makers begin to cover their borrowed shares.   But, if anyone lowers their sell price, then we'll see the bid start at whatever that price is, the market makers get cheaper shares and make more money, taking it right out of your pocket.

I know it can be hard to sit there and wait it out, but it is THE BEST THING that you can do. That's what I recommend. That should happen in no longer than three trading days time.

See you in the market tomorrow.