Editing 2094: Short Selling

{{comic
| number    = 2094
| date      = January 4, 2019
| title     = Short Selling
| image     = short_selling.png
| titletext = "I'm selling all my analogies at auction tomorrow, and that witch over there will give you 20 beans if you promise on pain of death to win them for her." "What if SEVERAL people promised witches they'd win, creating some kind of a ... squeeze? Gosh, you could make a lot of–" "Don't be silly! That probably never happens."
}}

==Explanation==
{{w|Short (finance)|Shorting stocks}} (short selling stocks) is a stock market practice. If we think of normal investing where we buy into a stock as betting on the stock rising in value then shortselling is a corresponding betting on a stock to fall in value. This inverse procedure is accomplished by getting the stock on a loan or "front" basis to begin with, then selling the stock that isn't actually owned, so that when the stock loses value you're able to pay back a lower amount and keep the difference. We , could say someone takes a risk because they believe that a certain stock's price is going to drop.  The risk-taker borrows stock from someone, and then sells the stock that they've just borrowed, keeping the money from the sale. They then owe that stock to the lender. But the risk-taker believes that they will be able to buy the same stock back on the stockmarket later on at a lower price, and then give it to the lender to replace what they borrowed.  If everything goes according to plan and the stock drops in price, the risk-taker will walk away with a profit.  Of course, if things don't go according to plan and the stock rises in price instead, the risk-taker winds up losing money, because they have to buy back the stock for more than they sold it.

Cueball asks Ponytail to explain shorting stocks.  Ponytail starts out with a fairy tale story that falls apart almost before she even starts.

The process of short selling a stock functions similarly to the initial parts of the story. The major steps in normal shorting are described here alongside the analogous (sort of) parts of the story:
:An investor decides that stock S is likely to decrease in value, and wants to make money from this difference. Stock S is currently selling for $5, but the investor believes it will drop in value to $1 or $2 in the near future.
:The person in the story is going to have a child, and believes that the child will be worth one or two magic beans. They have been offered a price of five beans for the child, and they see this as a benefit.

:The investor finds a person willing to allow them to borrow stock S now. This is usually done through a broker. The investor then sells the stock they borrowed, adding $5 to their account. They plan on waiting until stock S is selling for $1, then buying it again. They will have made $4 in profit, and can return the stock they borrowed.
:The parent in the story sells the rights to their child for five beans. Even if their child is worth one or two beans to them, they will end up making a profit of three or four beans.

:Stock S does not decrease in price, but increases dramatically to $200. The investor has promised to return the stock within a specific timeframe, and they must do this or they will be in violation of various laws and contracts. They can wait in the hopes that the value will drop again, but they will eventually have to buy the stock for the new price of $200. They will lose $195 on this transaction.
:The child is born, and the parent involved decides that they love the child. They would put a valuation of this child at two hundred magic beans, and would prefer not to turn the child over to the witch. They have no choice, however, as they have formerly agreed to do this.

This part of the story somewhat matches the process of short selling a stock, except that there is a convenient market for buying and selling stocks at a common price, while a network of witches buying children or a method of valuing them does not exist.{{Citation needed}}

Ponytail's version does not make exact analogies to the process of short selling. The first major difference occurs when  the father sells a child he hasn't had yet to a witch.  Like short selling, the father is selling something he doesn't own.  But unlike short selling, the father is selling something that doesn't exist yet. The somewhat broken analogy breaks further when Ponytail says the father now is going to fight the witch instead of paying the witch with the child.  There is no legal option to "fight" the other person if a shorted stock or call-writing strategy fails. You simply lose money.

Our now definitely broken analogy breaks down even further (if possible) by sending the kid up the beanstalk to fight the giant - a giant that Ponytail says represents high interest rates.  Interest rates have nothing to do with shorting stocks.  (Technically they can, but the short seller would have / should have calculated that when determining if their investment strategy would work.) In addition, it is not possible for the investor, on their own, to fight interest rates that are harming their strategy, as those rates are set by lenders and are based on the credit worthiness of the borrower, the stated use case for the funds, and the nation's government's monetary policy.

Cueball comments that the analogy is rapidly losing its value to him.  Ponytail fires back with the comment that he should have shorted her advice before asking for it, thus making a profit. The decreased helpfulness of her wisdom is analogous to the decreased value of a shorted stock price. She once again proves that she lacks the knowledge of how short selling functions, or at least the knowledge to explain it, as her advice does not have a price to anyone, was presumably given to Cueball for free, and cannot be traded.

Her story appears to be based on plot elements of multiple fairy tales. It begins by mixing up the story of {{w|Rapunzel|Rapunzel}} with {{w|Jack and the Beanstalk|Jack and the Beanstalk}}.

In one version of {{w|Rapunzel|Rapunzel}} a Father breaks into a witch's garden to steal the Rapunzel plant for his pregnant wife. The Witch catches him and agrees to let him go and not punish him in exchange for the child. 

In one version of the "{{w|Jack and the Beanstalk|Jack and the Beanstalk}}" fairy tale story, Jack sells a cow for magic beans.  His mother, thinking the beans are fake, is angry with Jack.  Jack plants the beans and a magic beanstalk grows up into the clouds.  Jack climbs the beanstalk and explores the land above the clouds.  He finds the home of a cruel giant and proceeds to steal from the giant.  The giant discovers the theft and chases Jack back down the beanstalk.  Jack reaches the bottom of the beanstalk first and cuts the beanstalk down.  The giant falls to his death, and Jack uses his stolen wealth to take care of himself and his mother.

The combination of the two stories is similar to the story from the musical "{{w|Into the Woods|Into the Woods}}," in which a Father sneaks into the Witch's garden to steal vegetables, then trades his soon to be born child for the vegetables, but also steals beans in the process.

The title text is actually the most useful part of this comic when it comes to investment advice.  The witch (the broker) is offering the father (short seller) 20 magic beans now if the father/short seller buys all of the analogies (stocks) later.  However, multiple witches/stock brokers trick multiple people into this strategy.  Since every father/seller now needs the same analogies/stocks, and multiple witches need the exact same complete set of analogies, a bidding war erupts and it's impossible to please all the witches.  The "winner" pays a much higher price than expected (limiting how much of a win it really is).  And the losers wind up either dead or enslaved (bankrupt). In the stock market the corresponding phenomenon is known as a {{w|short squeeze}}, hence Cueball's comment. However, if the witches implement this strategy by discussing among themselves to orchestrate the phenomenon, it would be in violation of various trading regulations, and brokers rarely have a reason to hope for their clients to go bankrupt.

==Transcript==
:[Cueball and Ponytail are walking together, talking.]
:Cueball: I don't understand shorting stocks.
:Ponytail: It's like when you promise your firstborn to a witch for five magic beans.

:[Ponytail close up]
:Cueball (off-panel): Is that a common–
:Ponytail: She's a sucker, right? You know your awful kid will be worth one or two beans at ''best''.

:[Ponytail and Cueball stopped, facing each other]
:Ponytail: But then it turns out you ''love'' your kid, a love worth 200 beans! You can't afford that loss!
:Ponytail: There's only one way out: 
:Ponytail: You gotta fight the witch.

:[Ponytail and Cueball stopped, facing each other]
:Ponytail: So you send your kid up the beanstalk to battle the giant, who represents interest rates.
:Cueball: This analogy is getting less helpful by the minute.
:Ponytail: If only you'd somehow shorted my wisdom before you asked.


{{comic discussion}}
[[Category:Comics featuring Cueball]]
[[Category:Comics featuring Ponytail]]