Short Selling

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Clusterstock  Nov 5  Comment 
Hedge fund manager David Einhorn, who runs Greenlight Capital, has closed out the rest of his famous Green Mountain Coffee short position, according to an investor letter.  He called it an "ultimately unsuccessful short."  "We closed out a...
The Hindu Business Line  Nov 5  Comment 
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SeekingAlpha  Nov 3  Comment 
StreetInsider.com  Oct 29  Comment 
Visit StreetInsider.com at http://www.streetinsider.com/Corporate+News/Metalico+%28MEA%29+Says+Stock+Declines+Tied+to+Aggressive+Short+Selling/9952353.html for the full story.
The Hindu Business Line  Oct 29  Comment 
Nifty October Futures (8073) In line with the Asian markets, the Nifty futures started the session on a positive note, opening at 8,081 from the previous close of 8,040 levels. This upward...
Reuters  Oct 27  Comment 
Italy's Consob has banned short selling on Monte dei Paschi's shares on Monday and Tuesday, the Italian market regulator said in a statement.
Reuters  Oct 21  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




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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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