September 27, 2008

Short Selling

Writing about web page http://news.bbc.co.uk/2/hi/americas/7626613.stm

As per my basic finance knowledge, "short selling" is defined as selling a security, already being traded in any of the organised exchanges across the globe, without effectively owning it (hence it is usually borrowed from a market-maker/stock-broker), in the hope that it will fall in value, thereby allowing one to buy it back at a lower price at a later date to return the borrowed security to the broker/market-maker. Thus effectively hedging oneself from expected dips in the stocks being traded on any organised exchanges across the globe. 

The possibility of selling a particular stock via such a mechanism adds to liquidity in the market of the particular stock, thereby artificially increasing the supply and further exhaserbating the downward spiral in the value of this particular security. This is why we see a control on such instruments in the financial markets nowadays:

As a result of the financial debacles in the west, we see that the the Securities and Exchange Commission temporarily banned "short-selling" in the stocks of 799 companies as highlighted in the press release on BBC [linked here]

Does this mean that even the SEC Chairman knows that short selling does more bad than good in the market?



- One comment Not publicly viewable

  1. Liquidity, is that what they call it? If you sell enough shares and can start a rush then, by definition, you will depress the price which then makes you money. A sort of self-fulfilling prophecy… and I thought that manipulating the market like that would be illegal as it is a simple matter to sell enough shares to depress the market and then buy them up later.

    Interestingly, I have an idea that in the comedy “Trading Places” short selling of futures is how the two ‘youngsters’ get their revenge on the two old boys who got them to swap lives. And therefore seen as a good thing.

    29 Sep 2008, 16:16


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