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Short Stock

June 02, 1998

Q: Can you short any stock, or just some stocks?

--Andrea Leverentz, Chicago

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A: To be shorted, a stock needs to qualify as "marginable." That means investors can purchase shares with funds borrowed from their brokerages. Most stocks on the New York Stock Exchange are marginable and many Nasdaq stocks also qualify, while stocks trading for less than $5 per share often do not.

For those who might have forgotten, shorting stocks involves reversing the usual order of investing. If you've heard about a books-on-tape retail chain called Tapeworm and you think its stock price is due to tumble, you might profit off its decline by shorting it.

You'd place an order to short-sell the stock through your broker, and the broker would borrow someone else's shares and sell them for you. What you're betting is that the stock will sink so you can replace the borrowed shares with shares purchased at a lower price.

What's the risk? If the stock soars instead of sinking, you will have to replace the borrowed shares with stock purchased at a higher price_--and a potentially big loss to you.

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Q: What are ADRs?

--M.B., Beaumont, Texas

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A: American depositary receipts make it possible for folks in America to easily buy and sell shares of foreign stocks that don't normally trade on U.S. exchanges. Without them, if you wanted to buy stock in Volkswagen, you'd have to convert your dollars into German marks and then somehow buy shares on the German exchange. Through ADRs, shares of Volkswagen are held by an American financial institution overseas, and you can trade shares with U.S. dollars. ADR holders are entitled to dividends and capital gains, but they have no voting rights.

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