Explaining the Uptick Rule.

This one's for you.

This one's for you.

The world of high finance is buzzing with the word ‘uptick’.

You may not know what that is, and wikipedia is written for people way smarter than us.  By people dumber than us.  That’s why you’re here.

Either that, or you completely misused Google.

When people say ‘uptick’, they’re referring to a rule concerning stocks.  When you buy a stock in say, Coach, you’re usually hoping the price goes up so you can make more money.   That’s the way the stock market works.

But not everyone is like you and I.  Some people are agents of Satan and hope that Coach does poorly.  They hope that you and your hot little friends buy less super cute bags and the stock price goes down.

That’s why they short it.

When someone shorts a stock, it means that they buy it hoping it goes down.  So they’ll buy Coach at 5 dollars a share.  If it goes to 3 dollars, they make 2 dollars a share.  It’s the exact opposite of buying a stock normally, which is what we call “going long”.

Oh dear.  I’m afraid this explanation is still much too complex.  Let’s drill down further.

Suppose you’re going out on Friday night but you need to borrow a dress that’s totally fun.  Your friend Sarah has 5 fun dresses.  You know they cost 500 dollars each because Sarah is an uppity bitch that needs to impress everyone.  You tell Sarah you need to borrow the dress and she lends it to you.

On Friday morning, your drug-dealing friend Peanut tells you he’ll give you 500 bucks for Sarah’s dress because he knows he can flip it on eBay.

Now you start thinking.  Sarah’s dress is way last-season and not nearly hot enough.  You know you can probably go buy it at the discount rack at Saks for $200.

So you tell Peanut okay, and give him the dress.  He gives you $500.  You go to Saks and buy the dress for $200.  Then on Saturday, you give Sarah back her dress.

You just made $300 dollars.

Isn’t that shocking?  Three hundred, bitches.

That’s exactly how people short stocks.  They borrow the shares hoping that the price goes down, buy it back at the lower price, and replace it.  Just like the dress!

Sometimes people do this a lot.  And it’s not really nice.  So the stock market people may consider using an “uptick” rule.  What that means is that you can only short a stock if the price is going upwards at the time you want to short it.  Let’s revisit our fun dress example.

Suppose you borrow Sarah’s dress and then on Friday, the chick from Pussycat Dolls wears it and it’s all over Perez and TMZ.  Then you see that Britney and Lady Gaga were wearing it too.  Even Beyonce is wearing it in US Weekly.

Now you know people are going to think that dress is hot.  Peanut tells you he’ll buy the dress for $500.

Do you still do it?

Basically, an uptick rule forces you to wait for the momentum of the stock to go upwards before you can short it.  It’s going to limit a bunch of people that manipulate stocks by eroding confidence in the market.  It is supposed to correct negativity and improve the economy.

Because really?

You and I both know that we’re doomed if a guy named Peanut is a power seller on eBay.

  • Though the impact of the Uptick Rule is inconclusive the market might need a shot in the arm. Its lack of confidence is evident in it’s plunge over the last few months.

    It is simply worth a try Congress should do what ever they can and this seems relatively simple so even Congress should be able to handle it! 😉

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  • For somebody who has absolutely NO understanding of the stock market, the dress analogy made PERFECT SENSE TO ME.

    Thank you.

    And yes, I would totally rock that dress better than her.

  • Thank you for teaching me something else I never needed to know. Now, if those giant sun glasses make my nose look smaller, isn't it all worth it? Also, I can hide the strange color of my eyes and those stupid tiny lines that seem to be forming under my eyes when I smile. I'm thinking of taking up frowning, but I think a stiff upper lip will cause fewer wrinkles. Manatees! If only I were a manatee! I could be wrinkled, saggy, grey-skinned, blubbery, and barrel-waisted, and then still be the belle of the aquatic ball.

  • You should write stuff like this more often 🙂

  • justniki

    I really like your article and I think it was written in a simplistic format for all to understand. There is only one thing I would like to mention, the people that you refer to as “Satan” are not bad people. They are just people that have done their homework on the market and can predict(hopefully) that it's likely that the stock will fall. They make their money that way, as I'm sure you know that there are actually three ways to make money on stocks. 🙂

  • SwedishChef

    I totally don't get this. “When someone shorts a stock, it means that they buy it hoping it goes down. So they’ll buy Coach at 5 dollars a share. If it goes to 3 dollars, they make 2 dollars a share.”

    I don't get what you mean by “buy Coach”. What are they buying exactly and what are they paying for it? If they buy it and the price goes down, how are they gonna make money on it?
    In your example you get the original dress for nothing, you don't pay for it.
    Confused. Well confused.

  • SwedishChef

    I totally don't get this. “When someone shorts a stock, it means that they buy it hoping it goes down. So they’ll buy Coach at 5 dollars a share. If it goes to 3 dollars, they make 2 dollars a share.”

    I don't get what you mean by “buy Coach”. What are they buying exactly and what are they paying for it? If they buy it and the price goes down, how are they gonna make money on it?
    In your example you get the original dress for nothing, you don't pay for it.
    Confused. Well confused.