Shorting shares is a way for profiting when the share price of a company falls. Investors on the stock markets will purchase shares with the expectation and hope that their value increases. However, it is also true that profits can be made when the prices fall. ‘To short’ means to sell a share that is not in one’s possession so that the investor buys it back when its price decreases. A profit is earned from this process.
But how is it possible to sell an asset that does not belong to someone? The investor in a short sale, usually a large investment bank or a hedge fund, comes to the agreement that the share value of a particular company will fall. Then, he decides to borrow the shares he does not own from someone else, most often an insurance company or a pension fund. Further along, he sells the shares on the market. The fall in the shares` value is the point at which he decides to purchase them again. Then, they are returned to the lender.
If the process goes smoothly, the investor profits from paying less than he has received from the sale of the shares. The loaning out of shares will be accompanied with fees that represent costs for the investor. However, the shorter is still able to make a profit.
It is not a secret that short selling is sometimes associated with market abuse and this is a cause for concern. One of the victims of such abuses is HBOS. In just an hour, its shares plunged due to rumors that the bank had financial problems reminiscent of the ones that led to the fall of Northern Rock. The rumors were false and the shares recovered quickly later in the same day. There were some suspicions that a hedge fund has planted the rumors in order to make a fast profit. Though illegal, such abuse is difficult to investigate.
Free charting webinar
Mon, Nov 18th, 2013 12:00 PM - 1:00 PM EST
During the 60 minute session Paul Coghlan, founder of Coghlan Capital, looks at current charts for currencies, precious metals, US indices, highlighting turns and low risk entry points using the Median line analysis methodology.
Median line analysis reduces risk and increases the chartists ability to see trend direction, trend strength and highlight entry and exit levels.
Seats are limited so be sure to reserve your spot today. The webinar will be recorded, by signing up you'll receive an email with the webinar replay afterwards.