Posted by Wilf
This could be a long one:
When a compnay goes public they offer shares to the buying public, those shares are held at an American wide clearing firm or registry named the Depository Trust Corproation or DTC for short. They become sort of the bank of all stock out there. They inturn send the shares to CEDE and Co which is their clearing firm.
So now you as a buyer go to your broker and put in anorder for say 1,000,000 shares of DPBE. The broker looks to see who is offering stock for sale, and lets pretend that is Nite. ( Nite by the way sells for thousands of brokerage firms, they are a wholesale firm) So your broker calls his trader and the trader calls nite and the order gets executed. You bought 1,000,000 shares, Nite sold one million shares so the total volume shows 2,000,000 shares.
The transaction is then reported to the DTC and they adjust the ledger accordingly so now lets pretend that you bought through TD Ameriatrade . DTC will transfer the stock to TD on the books, they have three days to do that or it is considered a short sale. A short sale happens when ever someone like Nite sells stock they do not own. There is a difference between a short sale and naked short sale
Short sale is when a firm lets say Alpine has 113,000,000 shares in my account and the stock is dropping in price, they will sometimes sell against positions they have registered and that is considered normal, in the evnet of market making. And it is allowed all day long and happens a lot.
A naked short is when they have no stock in any account and no position registered at the DTC and they still sell in the anticipation of a share price falling. This one is supposed to be against the law, but if they go out on a naked short and they can't cover then they call up someone that has shares and borrow them to then hold a short position.
The float is the stock cleared at Cede and CO ready to trade. In our case that amount will drop as soonas they send me my cert in the amount of 113,000,000 shares. If I do it again our flaot will drop some more. The theroy is if you reduce the float the price has to go up becasue there is less and less stock to meet the demand of buyers as more and more news goes out.
A good example of this is a pie auction. If every one wants lemon pie and there is only one lemon pie for sale, but 30 apple pies, the price pof the lemon pie is going to go up, it can't be helped.
There are really 4 important numbers, well maybe 6
1) Authorized How many shares can a company issue In our case 2,000,000,000
2) Issued and outstanding How many shares are actually issued In our case about 1,300,000,000
3) Float How many shares are at Cede & Co that can trade In our case about 850,000,000 but now 113,000,000 shares less
4) Shares held under rule R144 that can not trade In our case about 550,000,000
5) Shares that show up on the DTC lists Again in our case about 850,000,0000 less the stock I ordered out last week
6) The number of shares that show up on the Non Objecting Shareholders list which is a list we can buy for about $2,000 that shows us how many sahreholders there really are and howmany of them have how many shares at which firm. (If I pull the DTC list and NOBO (Non Objecting Shareholders list) together then look at my transfer records I can tell you almost to the exact share who sold what to who and if the stock is short sold or not. Once a person knows the number of short holds in a stock they can try to do a short squeeze on a stock, what that means is a buyer trys to buy more shares than is really held at DTC, then he demands his certificates to be delivered in, If he makes that demand the DTC can force the brokers whp are short to go in and buy shares out of the open market to cover the short, after all they sold you the stock, now they havve to deliver it. If that can happen then the price of any stock can go through the roof.
A short squeeze is really hard to run and you have to know for sure where the stock is. And the only way you can know that is if it is in your own safe. So if this were a perfect world for me, I would keep buying shares in DPBE until I had bought lets say 851,000,000 shares and had called in all of it but say 30,000,000 shares. Then I would keep buying untill I had bought another 100,000,000 shares becasue some fool had gone short. Then I would call in the 30,000,000 in say 5,000,000 share blocks so that the first one or two could be delivered. About this time the DTC looks around and says Hey where did all the stock go? The next thing you know they force XYZ broker who sold short ot cover his positions. Now remeber no one is supposed to go short anymore on pink sheets,,,,,, but how come there is 70,000,000 shares missing. Well now I'm sitting there with a lot of shares in my safe. My broker knows I've got a lot of shares in my safe and so I slowly trickel 20,000,000 into the market and feed the short, just enough to stop it from being a full blown train wreck. But then the DTC forces the shorter to fill. I stop selling back to him and now he has to offer more and more per share becasue he is still trying to cover a 50,000,000 share short.
There is no way for him to get out unless I let him out and I can let him out at whatever price I decide. So lets pretend i sell him the 50,000,000 shares at $3.00 persahre and he finally covers and goes away. He is covering the stock he already sold me last year. So now he gets the stock and sends it to my broker along with his 150,000,000 in cash that he had to pay to get the stock back from me in the first place.
Now the only way this can work is if the companycan regain it's paper. And the only way a company can regain it's paper is to buy it back. Well that all takes cash. But what happens if a company finds say 100,000,000 on the ocean floor and then goes in and buys the living bejeepers out it's own stock. It can happen. So anyone stupid enough to go short on a company that has two major contracts and several identified wreck sites some of which have already produced silver and gold, deserves what they get.
The next two or three years should be a lot of fun.
Hope that helped.
Wilf
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