Difference between revisions of "Short sale"

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A short sale occurs when someone [[borrow]]s a [[security]] (or a [[futures contract]]) from a [[broker]] and [[sell]]s it, with the understanding that he or she will later [[buy]] it back (hopefully at a lower [[price]]) and return it to the [[broker]]. Investors use [[short]] selling (or "selling short") to try to profit from the falling price of a [[stock]].  
A short sale occurs when someone [[borrow]]s a [[security]] from a [[broker]] and [[sell]]s it with the obligation to later [[buy]] it back (hopefully at a lower [[price]]) and return it to the [[broker]]. Investors use [[short]] selling (or "selling short") to try to profit from the falling price of a [[stock]].  


For example, if an investor believes [[stock]] x is overpriced and will fall, he might want to sell short 100 [[share]]s of x. His [[broker]] will borrow the shares from someone who owns them with the promise that the investor will return them later. The investor immediately sells the borrowed shares at the current market price. If the price drops, he "covers" the short position by buying back the shares, and his broker returns them to the [[lender]].  
For example, if an investor believes [[stock]] x is overpriced and will fall, he might want to sell short 100 [[share]]s of x. His [[broker]] will borrow the shares from someone who owns them with the promise that the investor will return them later. The investor immediately sells the borrowed shares at the current market price. If the price drops, he "covers" the short position by buying back the shares, and his broker returns them to the [[lender]].  
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The profit is the difference between the price at which the stock was sold and the cost to buy it back, minus commissions and expenses for borrowing the stock. If the price goes up, however, the potential for loss is unlimited, because at some point the investor must replace the 100 [[share]]s of x he sold.  
The profit is the difference between the price at which the stock was sold and the cost to buy it back, minus commissions and expenses for borrowing the stock. If the price goes up, however, the potential for loss is unlimited, because at some point the investor must replace the 100 [[share]]s of x he sold.  


Short sellers are in the minority, making up on average less than 5 percent of positions on the [[New York Stock Exchange]].<ref>{{cite web|url=http://www.fsa.gov.uk/pages/Library/Communication/PR/2008/102.shtml|name="Short Selling: Nasty, Brutish and Short"|org=The Economist|date=July 31, 2008}}</ref>
Traditionally, short sellers have been in the minority, making up on average less than 8 percent of positions on the [[New York Stock Exchange]], according to various reports. <ref>{{cite web|url=https://www.economist.com/finance-and-economics/2008/06/19/nasty-brutish-and-short|name="Short Selling: Nasty, Brutish and Short"|org=The Economist|date=July 31, 2008}}</ref>


== SEC Vote To Restrict Short Sales Of Stock ==
== SEC Votes to Restrict Short Sales of Stock ==
On Feb. 24 of 2010, SEC commissioners voted 3-2 to restrict short sales of a company’s stock once it falls 10 percent from the previous day’s closing price. When the 10 percent threshold is triggered, [[trader]]s could only execute short sales for the stock at a price above the market’s best [[bid]]. The curb would be in place through the following day.<ref>{{cite web|url=http://www.fsa.gov.uk/pages/Library/Communication/PR/2008/102.shtml|name="SEC Curbs Short Selling, Disappointing Goldman Sachs"|org=Bloomberg|date=February 25, 2010}}</ref>  
On Feb. 24 of 2010, SEC commissioners voted 3-2 to restrict short sales of a company’s stock once it falls 10 percent from the previous day’s closing price. When the 10 percent threshold is triggered, [[trader]]s could only execute short sales for the stock at a price above the market’s best [[bid]]. The curb would be in place through the following day.<ref>{{cite web|url=http://www.fsa.gov.uk/pages/Library/Communication/PR/2008/102.shtml|name="SEC Curbs Short Selling, Disappointing Goldman Sachs"|org=Bloomberg|date=February 25, 2010}}</ref>  


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One day later, the [[U.S. Securities and Exchange Commission]] said it would temporarily ban investors from short selling 799 financial companies. The temporary ban, aimed at helping restore falling stock prices that shattered confidence in the [[financial market]]s, took effect immediately.<ref>{{cite web|url=http://money.cnn.com/2008/09/19/news/economy/sec_short_selling/?postversion=2008091907|name=SEC bans short-selling|org=CNNMoney.com|date=September 19, 2008}}</ref>  
One day later, the [[U.S. Securities and Exchange Commission]] said it would temporarily ban investors from short selling 799 financial companies. The temporary ban, aimed at helping restore falling stock prices that shattered confidence in the [[financial market]]s, took effect immediately.<ref>{{cite web|url=http://money.cnn.com/2008/09/19/news/economy/sec_short_selling/?postversion=2008091907|name=SEC bans short-selling|org=CNNMoney.com|date=September 19, 2008}}</ref>  


The SEC ban is set to expire on Oct. 2, but it is expected to be extended past that date.<ref>{{cite web|url=http://www.tradersmagazine.com/news/102115-1.html?ET=tradersmagazine_news:e177:47854a:&st=email|name="Short Sale Ban Chases High-Frequency Traders From the Market"|org=Traders Magazine|date=September 29, 2008}}</ref>
== Short Sale Bans and Market Volatility in 2020 ==
 
Short selling again came into regulators' focus in early 2020, during the volatile months of the pandemic, with the U.K., Spain, Italy and South Korea among the countries that implemented temporary curbs on the practice. The U.S. did not impose a ban in 2020 and then-SEC Chairman Jay Clayton argued against a curb. <ref> {{cite web|url=https://www.wsj.com/articles/countries-curb-short-selling-to-stem-steep-market-drops-11584112007?mod=searchresults&page=1&pos=8|name=Countries Curb Short Selling to Stem Steep Market Drops|org=WSJ.com|date=January 27, 2021}}</ref><ref> {{cite web|url=https://www.wsj.com/articles/sec-chairman-government-shouldnt-ban-short-selling-in-current-market-11585568341#:~:text=During%20the%202008%20financial%20crisis,in%20shares%20of%20financial%20stocks.&text=Economists%20say%20short%20sellers%20help,regard%20it%20as%20a%20mistake.|name=SEC Chairman: Government Shouldn’t Ban Short Selling in Current Market|org=WSJ.com|date=January 21, 2021}}</ref>
'''CBOE Creates Short Sale Update Information  '''
In September of 2008, [[Chicago Board Options Exchange]] ([[CBOE]]) launched a "Short Sale Update" Web Page (http://www.cboe.com/ShortSale) to keep [[options]] traders, customers, and CBOE Members fully informed on recently enacted restrictions on short sales. It contains a full compendium of links to lists of the prohibited financial securities, by exchange, and lists relevant SEC and CBOE information documenting the various restrictions. No one source had previously been created to lay out the broad swath of regulatory information on this issue.
 
Because regulations can and do change, CBOE plans to keep the Web page updated.


== References ==
== References ==

Latest revision as of 18:59, 27 January 2021


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A short sale occurs when someone borrows a security from a broker and sells it with the obligation to later buy it back (hopefully at a lower price) and return it to the broker. Investors use short selling (or "selling short") to try to profit from the falling price of a stock.

For example, if an investor believes stock x is overpriced and will fall, he might want to sell short 100 shares of x. His broker will borrow the shares from someone who owns them with the promise that the investor will return them later. The investor immediately sells the borrowed shares at the current market price. If the price drops, he "covers" the short position by buying back the shares, and his broker returns them to the lender.

The profit is the difference between the price at which the stock was sold and the cost to buy it back, minus commissions and expenses for borrowing the stock. If the price goes up, however, the potential for loss is unlimited, because at some point the investor must replace the 100 shares of x he sold.

Traditionally, short sellers have been in the minority, making up on average less than 8 percent of positions on the New York Stock Exchange, according to various reports. [1]

SEC Votes to Restrict Short Sales of Stock[edit]

On Feb. 24 of 2010, SEC commissioners voted 3-2 to restrict short sales of a company’s stock once it falls 10 percent from the previous day’s closing price. When the 10 percent threshold is triggered, traders could only execute short sales for the stock at a price above the market’s best bid. The curb would be in place through the following day.[2]

Short Sales On Financial Companies Prohibited in UK and US in 2008[edit]

On Sept. 18, 2008, the board of the Financial Services Authority (FSA) announced it would introduce new provisions to its Code of Market Conduct to prohibit the active creation or increase of net short positions in publicly quoted financial companies. The goal was to protect the fundamental integrity and quality of markets during disorderly market conditions. The new provisions were implemented at midnight.[3]

One day later, the U.S. Securities and Exchange Commission said it would temporarily ban investors from short selling 799 financial companies. The temporary ban, aimed at helping restore falling stock prices that shattered confidence in the financial markets, took effect immediately.[4]

Short Sale Bans and Market Volatility in 2020[edit]

Short selling again came into regulators' focus in early 2020, during the volatile months of the pandemic, with the U.K., Spain, Italy and South Korea among the countries that implemented temporary curbs on the practice. The U.S. did not impose a ban in 2020 and then-SEC Chairman Jay Clayton argued against a curb. [5][6]

References[edit]