Short Selling - Education

[aussieshort.com]

What is Short Selling?

Short selling is one of the easiest ways to profit from a falling share price. The profit/loss moves dollar-for-dollar with movements in the share price.

As you are aware an investor is able to buy a stock and make a profit when the share price rises in value. However not many people know that you can profit from the share price falling.

Short selling involves the sale of a share that the investor does not own with the view of buying it back at a cheaper price.

For an investor to sell shares that they do not own they must first borrow them from their broker. The broking firm will then enter into an arrangement to borrow the shares from an institution (e.g. Macquarie Bank). The shares are then given to the investor to sell with the intention of buying them back at a lower price in the future.

If the price falls as anticipated the investor is able to purchase the shares at a lower price and make a profit on the difference between the purchase and sale price. Once the shares have been bought back they are then delivered back to the institution.

Things to consider:
Margins: These are the costs required to hold the trade
Stock Lending charge: Fee to borrow the stock from the broker
Dividends: You must pay the lender of the stock any dividends, franking credits and rights declared during the course of the loan.
Brokerage: You need to take into consideration transaction costs.
Time Frame: Short selling is generally a short term trading strategies.

Stay tuned for part two; When to short and Stop loss.

 

[nioka]

Short selling is a blight on the investment market. Investment in shares should be investing capital in a company for productive purposes. Gambling in the value of those shares does nothing at all in the way of productivity. All it does is transfer wealth for someone to someone else and has that wealth diluted in the process. It confuses the value of an investment and , in many cases reduces the capacity of a normally productive business to compete and produce profitably. Short trading should be controlled and each trade should be reported as a trade so that the general investing public know the extent that shares are short traded. I'd be happy to see it banned completely.

In short selling education there should be education in the consequences of the practice before any other education in the process itself.

 

[Trembling Hand]

Nioka that really surprises me. REALLY!!

You are not an investor but a speculator just like 98% of people on this site. I mean how many put money up at the IPO or capital raising stage?? Those that do how many can say that that is mostly there investment process. Very Very few.

From what I can remember of your trading it is no different than from mine or any other punter. Pure speculation. That is the money you put up doesn't go to "investing capital in a company for productive purposes" but rather just another gamble. Just because you only play on the longs side doesn't make you any better than the rest of us gamblers.

please could you provide some facts to the rubbish that you provide investment capital in a company for productive purposes.

 

[It's Snake Pliskin]

Nioka that really surprises me. REALLY!!

You are not an investor but a speculator just like 98% of people on this site. I mean how many put money up at the IPO or capital raising stage?? Those that do how many can say that that is mostly there investment process. Very Very few.

From what I can remember of your trading it is no different than from mine or any other punter. Pure speculation. That is the money you put up doesn't go to "investing capital in a company for productive purposes" but rather just another gamble. Just because you only play on the longs side doesn't make you any better than the rest of us gamblers.

please could you provide some facts to the rubbish that you provide investment capital in a company for productive purposes.

TH,

I am annoyed by the comments of Nioka too.

Nioka,

Forget the sensationalist news stories in the media.

 

[nioka]

Nioka that really surprises me. REALLY!!

You are not an investor but a speculator just like 98% of people on this site. I mean how many put money up at the IPO or capital raising stage?? Those that do how many can say that that is mostly there investment process. Very Very few.

From what I can remember of your trading it is no different than from mine or any other punter. Pure speculation. That is the money you put up doesn't go to "investing capital in a company for productive purposes" but rather just another gamble. Just because you only play on the longs side doesn't make you any better than the rest of us gamblers.

please could you provide some facts to the rubbish that you provide investment capital in a company for productive purposes.

I'm happy to admit to trading in shares but I'd like to think that I am also investing in companies that are productive. Hedge funds are destructive and not productive in many cases. The system allows them to have the capability to destroy the financial viability if a company.

You ask for an example; ADI, an oil prospector, recently had an SPP to raise additional funds for oil drilling expenses. It is not rubbish to suggest that was one example of investment for productive purposes. There are examples of these each day if you look for them.

The transfer of shares from one owner to another keeps the funds in a company for productive purposes. That is productive share trading. I can find little in the way of productivity in short or long selling as such.

 

[nioka]

TH,

I am annoyed by the comments of Nioka too.

Nioka,

Forget the sensationalist news stories in the media.

Truth hurts!!!!!!

 

[It's Snake Pliskin]

Truth hurts!!!!!!

No, bigotry hurts.

 

[Trembling Hand]

I'm happy to admit to trading in shares but I'd like to think that I am also investing in companies that are productive.

It could be argued that the shorts are very productive in quickly finding the real value in a company and not wasting investors time & that includes letting crappy companies continue to use their too high share price for destructive capital raising....... Think ABC Learning....BNB....CNP shall I go on!!

Hedge funds are destructive and not productive in many cases. The system allows them to have the capability to destroy the financial viability if a company.

Bloody hell when will the punters stop and think?? Hedge funds are Net long MOST of the time. As the saying goes..... they don't pick the fight they just finish it!!

You ask for an example; ADI, an oil prospector, recently had an SPP to raise additional funds for oil drilling expenses. It is not rubbish to suggest that was one example of investment for productive purposes. There are examples of these each day if you look for them.

Yes But honestly how much of your trading is in this form?? 1% 2% 10%?? What about the overall market? Probably less than 1%.

The transfer of shares from one owner to another keeps the funds in a company for productive purposes. That is productive share trading. I can find little in the way of productivity in short or long selling as such.

Its all the same. Value discovery. whether its buy first then sell or sell first then buy. It all comes out in the wash......

 

[Aussiest]

Short selling is a blight on the investment market. Investment in shares should be investing capital in a company for productive purposes. Gambling in the value of those shares does nothing at all in the way of productivity. All it does is transfer wealth for someone to someone else and has that wealth diluted in the process. It confuses the value of an investment and , in many cases reduces the capacity of a normally productive business to compete and produce profitably. Short trading should be controlled and each trade should be reported as a trade so that the general investing public know the extent that shares are short traded. I'd be happy to see it banned completely.

In short selling education there should be education in the consequences of the practice before any other education in the process itself.

In a way, i tend to agree with this. Hedge Funds can almost destroy a price. It does interfere with the growth of a company seeing as though short sellers are eager to see the price go down. I don't agree that short selling simply exploits a price that is already going down, i think in some cases, it can cause the price to go down, which is counter to why companies list in the first place.

I don't think that short selling should be banned, i think it needs to be regulated, eg, capped, and that it should be disclosed, as it does provide a slightly unrealistic view of market sentiment on a certain share.

Having said that, i have taken a few short positions.

Short selling is merely a vehicle us traders can use in order to exploit the market. It doesn't provide any real foundation towards company growth!

 

[cuttlefish]

As an aside the first post in this thread looks like an advertisement for aussieshort.com to me.


In relation to short selling - I'm not a great fan of it though I do accept some of the arguments that support it.

My biggest issue with it is not so much that it is allowed to occur but more the lack of consistency and transparency around the way it is implemented.

Stock 'lending' is a misnomer - it is really a title transfer - so the lender is exchanging security of title for counterparty risk against the borrower. The second part is there is very little transparency as to how much of a particular stock has been 'lent' (title transferred to another party). The Opes prime, Chimaera and other situations have highlighted the impact this lack of transparency and disclosure can have.

Title of stock greater than 5% of company value can be transferred via 'stock lending' without being disclosed to the market. This creates a situation that can be exploited to manipulate the market - in the same way that not requiring substantial shareholder notices on the long side would allow for a manipulation situation. There is a reason both for substantial holder notices and also the 20% takeover threshold.

The other question is on the lending side - how much transparency is there in the lender as to how much stock lending they are doing and how much risk that is creating for that institution.

If a super fund is lending stock to a short seller - how does an investor in that super fund know that this is occurring and how does that fit in with the investment funds goals and guidelines as communicated to the investor in that fund. e.g. Does a retiree thats invested in an 'aussie income' fund know that their income generating stocks might be being lent to a hedge fund of unknown financial status? What would the impact of a hedge fund collapsing have on that super fund?

Its this lack of regulation and transparency that is the bigger issue and contributes heavily to the level of distrust surrounding short selling.

 

[Trembling Hand]

I don't agree that short selling simply exploits a price that is already going down, i think in some cases, it can cause the price to go down, which is counter to why companies list in the first place.

No doubt you have evidence for this

 

[Aussiest]

No doubt you have evidence for this

Do you have evidence for half the things you say?! Lol. (meant with respect, just asking).

 

[Trembling Hand]

Do you have evidence for half the things you say?! Lol. (meant with respect, just asking).

Well kinda. I know the only way to get short volume is by selling at highs when everyone else wants in and the only way to buy volume is by buying when everyone else wants out.

Hedge funds don't short at the bottom!! No one who moves volume does.

So how about it? When did they "make" a company SP go down that didn't have some sort of fundamental or speculative reason to it?

 

[nomore4s]

lol, all this crap about short selling makes me laugh.

You all carry on about how the hedge funds manipulate the market by short selling and how it's not fair on the retail investors etc etc.

Who do you think the markets are for? Retail investors?

Get a grip, the markets are for the big money players, they control the market and if they didn't there wouldn't be a market. Whinging that it's not fair is a joke, we all know (or at least should) the risks before we enter.

Short selling didn't cause companies lke BNB, ABS, CNP, AED, MFS to collapse. Poor management and business practices like loading up on debt with no thought about the consquences did.
Even if you couldn't short sell these companies would have had exactly the same problems.

I didn't see anyone whinging when the big money was pushing prices up by the same practices when the bullmarket was in full flight.

When are you guys going to realise that market conditions have changed and risk is being priced in now? Until people realise this and change thier investing/trading to suit people are going to get burnt.

 

[Aussiest]

Hm, example: if share price looks weak, short sellers get in there and place lots of sell orders. This creates impression that share is being dumped, rather than being sold off (no, they are not the same thing. Dumped = sell off at a faster rate, panic selling). This may cause panic in the market, which results in more sell orders. Confidence in long positions may dwindle, therefore eroding share price unnecesarily. Whether this price fluctuation is temporary or more enduring may vary from company to company.

From what i've read, ABC Learning and BNB were 'attacked' by short sellers, and i reckon that MQG was recently attacked, cause of the number and frequency of sell orders a few weeks ago.

I don't have evidence, but do you have evidence to the contrary?

It seems to be common sense that if there are more sell orders than buy orders, that the price will be pushed down.

Saying that short selling does not effect the market is like saying that technical analysis is the only thing to consider when buying shares. Recent bad news and it's affect on share prices is evidence of that.

 

[Aussiest]

Whinging that it's not fair is a joke, we all know (or at least should) the risks before we enter.

Short selling didn't cause companies lke BNB, ABS, CNP, AED, MFS to collapse. Poor management and business practices like loading up on debt with no thought about the consquences did.
Even if you couldn't short sell these companies would have had exactly the same problems.

I don't think people are whinging, i think they are taking a critical, objective look at how short selling does or may affect the market! Big difference. As i said before, i have short traded a few times, but i think it should be disclosed for various reasons that have been mentioned here.

In relation to BNB, wasn't it the gas explosion that affected BNB Power, that drove the price down?

 

[Trembling Hand]

From what i've read, ABC Learning and BNB were 'attacked' by short sellers, and i reckon that MQG was recently attacked, cause of the number and frequency of sell orders a few weeks ago.

I don't have evidence, but do you have evidence to the contrary?

Well there you go. Stop reading the populous crap that you are reading....It does you no favours. It sounds like Today/Tonight journalism.

As far as evidence goes I move more volume per week than most do in a life time of trading. Have shown this from time to time on ASF. If I have learnt anything from this is you can ONLY sell volume when the desperate want in (thats up trends) and you can only buy volume when the desperate want out!!

 

[Aussiest]

Well there you go. Stop reading the populous crap that you are reading....It does you no favours. It sounds like Today/Tonight journalism.

As far as evidence goes I move more volume per week than most do in a life time of trading. Have shown this from time to time on ASF. If I have learnt anything from this is you can ONLY sell volume when the desperate want in (thats up trends) and you can only buy volume when the desperate want out!!

I don't really listen to what people write, i take it into consideration.

I see what you're saying that you can only 'sell' when people actually want 'in', but what happens when multitudes of people sell with few buyers lined up. The price would be pushed down. So, if somebody has inside knowledge, they can place multiple sell orders, thus pushing the price down and creating the impression that many want out, which would erode optimism on the stock.

There was something else i was going to say, but am busy at work, so will have to wait .

But, what i will say is, that on further consideration, perhaps short selling just interferes with the price short term, eg, causes short term fluctuations in price, rather than devalueing a company altogether . The jury is still out on that one for me.

One thing is for sure, i still think that short selling should be regulated somehow, eg, Hedge Funds are limited as to the volume they are allowed to move, and that stock lending should be declared.

 

[nomore4s]

From what i've read, ABC Learning and BNB were 'attacked' by short sellers

The fact that directors had margin calls against them probably had more of an effect on the share price than short sellers, as these shares would have been dumped on the market at any price but short sellers of any decent volume as TH has stated will be done at the top of the market.

And remember short sellers have to buy back in at some stage.

Also I haven't seen these share prices rise after the shorts have cleared out, in fact they've continued to fall.

 

[nioka]

No, bigotry hurts.

Please explain!!!!