zip106

Notice that France, Italy, Belgium and Spain have put a 15 day ban on short-selling to try and combat the volatility in the stocks.

In laymans terms - how, and will, this help stabilise the markets?

I remember our own (well, Labour anyway) Government did a similar thing back in 2008/2009?

alloy

In theory you remove speculative short sellers who may traget a stock as the only sales that can be processed are to close out long positions. On the flipside though short selling is a market efficient strategy and by removing the short sellers you are also removing future buyers who will have to buy back their short positions to lock in profits....

However they have only banned financial short selling for 15 days in France, Italy, Spain and Belgium so whilst their banks may hold up "better" you will just see UK and German banks getting hit harder as more people short sell them and supply increases (if there is reason to short banks....)

As we saw during the financial crisis a ban on short selling did nothing to stabilise or stem the falls. I think the move comes in the wake of the SocGen rumours and blatant market manipulation but the reality is if you want short exposure on banks you can still do it in the options market anyway.....long/short of it all....business as usual pretty much

Henrik

iTrader: (5)

It doesn't. A short seller has to buy at one point anyway, so it adds buyers further down the line.

It's stupid government intervention as usual, where they think they have to be seen to do something, IMO.

alloy

Also someone mentioned to me this morning you can still short sell the French/Belgian/Italian/Spanish banks on UK regulated exchanges they trade on such as Chi-X and BATs although i haven't been concerned to clarify that

GlesgaKiss

Usually when they start blaming short sellers and speculators it means there's an even worse problem than we think.

alloy

+1 it raises my concerns, but in the context of SocGen/French Asset Manager/French Creidt downgrade rumours....it kind of makes sense a little

zip106

Interesting, thanks.

And I even understand it now - bonus!

scud8

iTrader: (1)

The usual concern about short selling is that, in some circumstances, it can be used to manipulate the price of a stock for profit. For example, if a short seller already has a significant short position in a stock, it may be worth his while selling the same stock short again for a lower price in order to push the price down further. While this makes the new trade less profitable, it can increase the potential profit on the existing short position.

You can make exactly the same argument about long trades (someone could buy at a higher price simply to push up the value of their existing holdings), but for some reason people don't get too excited about this.

The US used to have the uptick rule to try to prevent market manipulation by short-sellers. Essentially this only allowed short sales at a higher price than the last trade, or at the same price as the last trade if that trade was at a higher price than the succeeding one. This rule was abolished in 2007.

Terminator X

iTrader: (7)

I still don't get it, sorry what is short selling, how does it make you money & why is it seen as "bad"?

TX.

Chip

It is a way of profiting from a fall in a company's share price. Most stock market investors buy shares in the hope and expectation that their value will increase as I do – "going long" in the jargon of the City – but it is also possible to make money when the opposite happens. Shorting means selling a share that you don't own in order to buy it back once it has fallen in price, netting a profit in the process.

Chip (Scoobynet share advisor )

scud8

iTrader: (1)

Short selling is where you sell a stock you technically don't own, hoping to be able to buy it cheaper in future - so your profit is the different between what you originally sold the stock for minus what you had to pay for later. Normal short selling requires you to borrow the stock to short sell in the first place, so you would have to pay a fee for the loan. Naked selling is where you don't even borrow the stock to sell in the first place, which used to be possible taking advantage of settlement lag - I believe with electronic trading this is not possible any more (and I think it is illegal anyway).

The reason people don't like it is they think evil speculators use it as a way profit by manipulating stock prices downwards, devaluing the holdings of investment and pensions funds in the process. Ironically investment and pension funds make a fair amount of money loaning their stock out to short sellers.

alloy

Short selling is just the exact opposite of what you normally do when you buy stock.

When you buy stock you exchange money for a number of shares, if the price of those shares appreciates then when you sell your shares you receive what you invested back plus the profit from the shares gaining in value. E.G. Buy 100 shares at £1 means you spend £100, they go up to £1.05 and you sell your 100 shares and you receive £105 realsing a profit of £5 on your initial investment.

When you sell short you simply sell stock (that you don't own) at a certain price and inturn receive money, if the stock goes down in value then you buy those shares back and keep the profit. E.G. sell 100 shares at £1 means you basically receive £100. The share goes down to £0.95 and then you buy your 100 shares back but this only costs you £95 to do, therefore you keep the £5 difference as profit. If the shares continue to rally to £1.05 and you buy your shares back then you are having to pay £105 to do so therefore you lose £5.

To sell stock that you don't own you need to have share borrow, share borrow comes from big investment pools/funds/banks etc who are long term investors. They essentially lend you the stock you need to short sell, in this case 100 shares, you inturn then pay them a financing fee daily and then have a debt to repay them back the shares they lent you when you exit your short position.

Cocker

iTrader: (3)

and if the share go "long" when youve gone short, you lose!

Interestingly i have a PAddy Power account which does FTSE 100 betting. So earlier on in the week i thought i'd have a few £££ on the markets dropping, they'd unsurprisingly taken that function off their website

markjmd

iTrader: (11)

Short-selling is the very definition of the stock-market as a casino, ie. trading in stuff you don't even own for one thing, and doing so on the sole basis of some completely arbitrary future outcome.

The traders would of course all have us believe the world will stop turning if it's not allowed

alloy

FAIL

Leslie

Sounds as though it is on the edge of fair trading to me. Bit of a fiddle in fact.

Les

alloy

Let us not forget that for every short seller out there, there is another person on the other side of the deal buying the stock off them......therefore it increases liquidity which is paramount to a stable market...

markjmd

iTrader: (11)

So you do or you don't believe the world would stop turning if all short-selling was banned?


Yes, why not make it sound as though the operation of any stock market would be nigh on impossible without this particular feature of it, that's bound to convince a few people it isn't just glorified casino betting

Trout

iTrader: (1)

Why is short selling any more casino like than going long.

Many traders go long on the margin, so they are investing money they don't even own!

markjmd

iTrader: (11)

Point one, judging solely on the meaning that the two words have outside of the finance context, a layman might easily be led to believe that the difference between short and long selling is merely the duration of time that shares are kept after purchase, when in reality that doesn't even come close to the full picture. Point two, it's a self-evident truth that in the ordinary buying and selling of goods, it's a physical impossibility to make a profit by intentionally putting your money into things you expect (or actually want) to decline in value. Put those two things together, and it's obvious to anyone with half a brain that to describe shorting as 'trading' at all is a naked perversion of the English language. It's really nothing more than the placing of a bet on the price of a stock falling.

Trout

iTrader: (1)

Is that true?

Short selling of commodities. Borrowing grain to sell on; knowing it is going to be a good harvest so you can fulfil at a much lower price later.

Short selling is not entirely new and probably predates the trading of equities.

markjmd

iTrader: (11)

That's the nub of it right there. The very fact that the practice isn't even possible without the additional contrived step of having to borrow the share, commodity, or whatever else it might be, at some point along in the overall process, is all the proof needed to demonstrate it's nothing like the conventional trading of goods.


Even in the very unlikely event that this turned out to be true, I don't really see what it would prove. There's plenty more that goes on in the equity markets which is no less spurious than shorting, and you won't find me trying to defend any of that either.

GlesgaKiss

What's your problem with these things exactly? Does it adversely affect you in some way? Just wondering, as it's part of a market composed of people making free transactions by way of mutual agreement.

Did a short seller steal your girlfriend once or something?

markjmd

iTrader: (11)

I was asked to volunteer a more detailed explanation of my original comment that shorting is a perfect example of the stock-market as a casino, which is what I've done. To the extent I have one at all, my 'problem' is with that wider casino attitude or culture, not with shorting specifically.

alloy

Well two views make a market, two views on the appropriateness of short selling seems suitable too....... short selling is a prominent feature on how I hedge risk and guess mitigating risk is exactly what you mean when you say it is a casino.....good luck to you but we are going to have to agree to disagree

Trout

iTrader: (1)

So what about borrowing money to buy long - a pervasive practice for even the smallest retail investor to the largest corporates?