Transcript: CIBC Investor’s Edge — What’s your game plan when stocks are dropping? Understanding short selling.

[Title Name: Rob - CIBC Investor’s Edge employee.]

[Title Name: Allison - CIBC Investor’s Edge employee.]

[Music playing.]

[CIBC logo. CIBC Investor’s Edge: What’s your game plan when stocks are dropping? Understanding short selling.]

[A mobile phone is shown with a line graph on the screen. The screen scrolls to show another line graph and bar graph.]

[Rob, a CIBC Investor’s Edge employee, stands in front of a wall with the CIBC logo on it and speaks.]

[A laptop is on the CIBC webpage Trade Stocks and ETFs. A person closes the laptop.]

Rob: What’s your game plan when stocks are dropping? Understanding short selling.

When stock markets start dropping, what can you do? You can sell your stocks and hold cash. You can keep what you have and hope things get better. But you can also consider a third strategy called short selling, a technique that lets you potentially profit from a drop in the price of a stock.

[A line graph titled: “Share price of stock XYZ”. The graph line moves up and down with an overall upward trajectory. There’s a blue box that explains it’s the “Share price”. On the left side are dollar amounts: $60, $70, $80, $90, $100. Beside the graph is a pointer that moves the graph line to the top of the graph.]

How is that possible? Imagine that you see a stock trading at a level much higher than you believe it's worth. You start thinking, hmm, if I own that stock, I would sell it right here. There is no way it could stay at these levels. I think the price will eventually be much lower.

And I think I know someone who owns the stock. My friend Allison.

[Allison walks and stands beside Rob.]

Hey, Allison. Lend me that technology stock that we talked about yesterday, would you? I'll return it to you later.

Allison: Sure Rob, I'll lend it to you, but you have to return it whenever I ask, no matter what the price is.

[Allison and Rob shake hands.]

Rob: I could agree to that.

[On the CIBC Investor’s Edge Site, the Trade Stocks and ETFs page, a dropdown box for the “Action” field states to: “Choose One: Buy, Sell, Short Sell”. “Short Sell” is chosen and highlighted.]

Now I'll sell the stock that I borrowed from Allison because I think the price is way too high.

Okay. Short sell. Very nice.

[Rob stands holding a large amount of bills in his hand.]

[A view of a city skyline at sunrise. The sun moves in fast motion. Beside it is a clock with its hands moving.]

Allision: Okay, Rob, I want that stock back now, please.

[The Graph titled: “Share price of stock XYZ” is shown. However, the graph line has a downward trajectory, ending on $60.]

Rob: Hmm. I don't have your shares because I already sold them, but no problem. I can just go into the market and buy them again. Let's see where they're trading. Okay. I sold those shares for $100. Now I can buy them for $60 and return them to Allison. And that leaves with a nice profit of $40.

Okay, that trade works.

[Rob holds two $20 bills and stands next to Allison.]

[How short selling works (in real life). A laptop is shown and opens to show a line graph and bar graph on the monitor.]

How Short selling works in real life. So that is almost how short selling works in real life, except that you won't actually know who Allison is.

[Rob and Allison stand together. Then Allison 

[A laptop monitor shows the CIBC Investor’s Edge Site, the Trade Stocks and ETFs page, a dropdown box for the “Action” field states to “Choose One: Buy, Sell, Short Sell”. “Short Sell” is chosen and highlighted. “XYZ” is typed under the Symbol field. Under the Quantity field, 100 is typed. Under the “Order price type” drop down box are the following selections: “Market, Limit, Stop, Trailing Stop limit $, and Trailing Stop limit %”. “Market” is chosen.]

In the real world, you'll enter a short sell order on the Investor’s Edge trading platform. They'll do the borrowing on your behalf, and you'll sell the stock, all in one action.

[A cursor then goes to the top of the page and selects “Account Information”, which brings up “My Accounts”. This page shows my account information: “Total Market Value (in CAD)”;“Account name”; “Cash”.]

The money from the sale then shows up in your margin account. Now, you won't necessarily have access to that money just yet.

Remember, you still have an obligation to return that stock to the lender whenever they ask. So that money has to stay there for now as a kind of guarantee that you'll be able to buy those shares.

[A line graph depicting the stock for company XYZ INC is shown. As time passes, the graph line shows a basic upward trajectory.]

If that stock price starts to move up, Investor’s Edge may ask you to deposit more money into your margin account. That's to make sure that you can still buy those shares when asked, even if the price moves higher. And you don't have to wait for the lender to ask you for the stock back, you can close this trade by buying the stock and returning it at any time.

[Graph titled “Risks on a short sale”, with dollar values starting at $10 and initially goes up by $2. The graph line rises at a sharp rate. The dollar values then change to increasing by $10, then by $100, then by doubling in amount and ending well over $51,200. The graph then changes back to increasing by $2 with a graph line mainly going down. When the graph line falls to zero, it stops and is circled in red.]

That's the general idea of short selling. But short selling has some unique risks that go along with it. That's because the stock price can theoretically rise to any price, even though if you think about it, it could only fall to zero.

Remember that you have to return those shares whenever you're asked, and if those shares unexpectedly rise a lot, and that can happen overnight in the case of a takeover, that may be the price you'll need to pay to return that stock.

We'll show you all the calculations you'll need to understand in parts 2 and 3 of Understanding short selling.

[CIBC Investor’s Edge is a division of CIBC Investor Services Inc. This document is provided for general informational purposes only and does not constitute investment advice. The information contained in this document has been obtained from sources believed to be reliable and believed to be accurate at the time publishing, but we do not represent that it is accurate or complete and it should not be relied upon as such. All opinions and estimates expressed in this document are as of the date of publication unless otherwise indicated, and are subject to change. The CIBC logo is a registered trademark of CIBC. The material and its contents may not be reproduced without the express written consent of CIBC.]

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