Ackman’s crusade against Herbalife—in plain English

The recent $200 million Herbalife settlement leaves us with some open questions

Herbalife

The recent $200 million Herbalife settlement leaves us with some open questions about how Herbalife will do in the stock market and what Bill Ackman will do with his short position.

In case you’re not entirely familiar with the concept, a short position is when a broker sells you a stock that they do not yet own. The broker is betting against a particular company, in this case Herbalife. The broker sells you “borrowed” stock at say $50 a share. They are betting that the stock will drop below $50, at which point they will actually buy the stock, at say $40. The broker then makes the difference of the $10 per share; you paid $50 and the broker paid $40. To put it simply, the broker—in this case Ackman—is betting that a company’s stock will decrease in value.

As of July 29, 2016, the stock price for Herbalife is up to 68.15 which is a positive 1.72% change. If you look at the past year, the stock price dropped in January of 2016 then gained over the last six months (up 47.22%). The recent settlement with the FTC coincides with another boost to the stock price. It seems that the market perception of this settlement is that it shows the FTC does not see Herbalife as a pyramid scheme.

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