Short Selling

RECENT NEWS
Reuters  9 hrs ago  Comment 
Portugal's CMVM securities market regulator has extended until Thursday a ban on short selling in shares of Portugal Telecom after they fell to a record low close on Tuesday.
Clusterstock  Oct 21  Comment 
Sometimes it just takes a gentle reminder from a key player to get a stock moving. On Tuesday, the stock was athenahealth, the player was Greenlight Capital's David Einhorn, and the reminder was that Einhorn is short the company. And here's...
Agrimoney.com  Oct 16  Comment 
Commodities, notably agricultural ones, post a largely positive session, helped by hedge fund liquidation - of short positions. But cocoa misses out
Financial Times  Oct 15  Comment 
Shorts rise to more than a third of total shares traded on exchange
Mondo Visione  Oct 9  Comment 
The Securities and Futures Commission (SFC) today reminds all market participants to comply with the requirements under the Short Position Reporting Regime (Regime) after the SFC has identified deficiencies and shortcomings since the...
Motley Fool  Oct 8  Comment 
A lot of investors are betting against Zulily today. Here's a look at how short selling works and whether Zulily is ripe for shorting.
Mondo Visione  Sep 11  Comment 
 The Stock Exchange of Hong Kong Limited, a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited (HKEx), announces that with effect from 18 September 2014 (Thursday), WH Group Ltd (Stock code: 288) will be admitted to the list of...
MarketWatch  Sep 10  Comment 
Short seller Carson Block, the founder of research firm Muddy Waters, has a short bet against Chinese online lottery platform 500.com according to news reports. "We're short it," Block said, according to Reuters, on the sidelines of an event at...
SeekingAlpha  Sep 4  Comment 
By Pedro de Almeida: I have been following Workday (NYSE:WDAY) since its recent (2012) IPO. WDAY is a well-known cloud/SaaS company that has been presenting fast growth. Since it was created in 2005, it is still a relatively recent company....




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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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