Short Sale

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.