Short Selling

Reuters  Jul 11  Comment 
Britain's financial regulator said on Friday that it has temporarily restricted short selling in shares of Portugal's Banco Espirito Santo (BES).
The Economic Times  Jul 9  Comment 
"Budget day should be choppy, that is no surprise but the idea would be to look at some kind of shorting opportunities on pullbacks."
Financial Times  Jul 8  Comment 
While some high profile hedge fund managers have warned of excessive market euphoria the industry is still unwilling to bet against the rally
Financial Times  Jul 7  Comment 
Bankruptcy of Gowex after being accused of being a fraud by Gotham City Research will strike fear into corporate wrongdoers across the globe
Mondo Visione  Jul 2  Comment 
The Securities and Exchange Commission today charged five traders for committing short selling violations while trading for themselves and Worldwide Capital Inc., a Long Island, N.Y.-based proprietary firm that earlier this year paid the...
The Economic Times  Jun 19  Comment 
An acceptance ratio of 70% means seven out of 10 shares an investor or a trader tenders in the open offer will be accepted, while three shares would be returned.
SeekingAlpha  Jun 19  Comment 
ByEnergyProfitProphet: SolarCity's (SCTY) plan for a gigawatt sized solar panel factory is, for lack of a better word, a bit crazy. One company that could see significant revenues and incomes from all these factory plans is GT Advanced...
The Hindu Business Line  Jun 15  Comment 
Tata Steel: The stock is ruling at a crucial level. Only a conclusive close above ₹575 will change the long-term outlook to positive. Though in the recent rally Tata Steel managed t...
SeekingAlpha  Jun 11  Comment 
This morning's announcement by Montage Technology Group (MONT) that it is being acquired, and the resulting run-up in its stock, has made this one of the best shorts I've ever seen, so I added to my position this morning. I first shorted Montage...


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Short selling is a method of profitting when stock prices fall.

Short selling and selling short are synonymous terms. The opposite transaction would be "buying long".

If you are "short" a stock, it means that you expect the price to go down. Short selling as a strategy has several inherent risks:

  1. In the long term, stock prices have generally gone up. So taking a short position is either a short-term bet against the market as a whole, or a bet against very specific companies.
  2. Margin interest. Because the first part of short selling is to sell the stock, it begs the question, "how can you sell what you don't own?". Simple, you borrow it (from your broker in this case). And because you are borrowing the stock and your broker is charging you interest until you return the shares, unless the stock is going down, margin interest charges will start gnawing down your cash. This aspect is another reason that selling short is usually done in a shorter term time frame. The closing transaction is "buy to cover."
  3. Unlimited liability. When you "buy long", your liability is capped. You can, at most, lose the value of your invesment (IE, if the stock costs $60 you can lose no more than $60). However, if you were to sell short and the stock price rose, there's no limit to the amount of money you could lose (as there is no theoretical upper limit on the stock price).

BEWARE: not all short or selling transactions are in anticipation of a downward move. If you short/sell a put option contract, that is typically a bullish to neutral prediction.

Short selling is controversial and is the subject of SEC proposals to restrict its use. A Wiki with links to the proposals and an opportunity to comment on them appears here.

Naked Short Selling

A "naked" short sale, refers to a short sale in which the seller makes the deal without ever having access to the securities to begin with. In a traditional Short sale, the buyer will borrow the securities. When no securities are available the naked short-seller will show that a sale has taken place even though nothing has actually been exchanged.

Until the short-seller has bonds to deliver, the buyer doesn't have to pay. But by showing that a sale has taken place even though the goods haven't actually been transferred, a naked short-sale artificially drives a stock's price down to a level that's not reflective of true supply and demand

Many financial economists believe that some short selling is necessary to prevent prices from reflecting only the views of the most optimistic investors in the market. In doing this, short sellers moderate prices both when they are shorting and when they later cover. Nonetheless, short selling has long been unpopular with security owners because they believe it can depress stock prices. There is little if anything security owners can do to prevent permissible short selling. A broker/dealer can accept a short sale order from a customer or effect a short sale for its own account so long as it meets the following conditions:

■ It has borrowed the security or made a good faith arrangement to borrow the security, or

■ It reasonably believes it can locate and borrow the security by the settlement day, and

■ It has documented compliance with either of the above two requirements.

Some forms of short selling are illegal. When a seller sells stock short but has not borrowed the security or made a good faith arrangement to borrow the security, or does not reasonably believe it can borrow the security by the settlement day, the short seller is probably engaged in impermissible “naked” short selling.

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