In finance, short sales (also known as short , short , or short ) is the sale of an asset (securities or other financial instruments) that the seller does not own. Sellers of such selling securities by borrowing assets to send them to buyers. Furthermore, the resulting short position is "closed" when the seller repurchases the asset in the market transaction and provides the purchased asset to the lender to replace the quantity originally borrowed. If a temporary price drop occurs, the short-term seller will profit, because the (return) purchase cost will be less than the result received at the initial sale (short). Conversely, a short position will result in a loss if the shorted instrument price rises before it is repurchased.
The potential losses on short sales are theoretically unlimited, as there is no theoretical limit to the increase in instrument prices. However, in practice, short sellers are required to post margins or collateral to cover losses, and the inability to do so in a timely manner will cause the broker or his partner to liquidate positions. In securities markets, sellers generally have to borrow securities to influence delivery in short sales. In some cases, a short seller must pay a fee to borrow a security and must also replace the lender for a refund of cash that the creditor will receive if the securities are not lent.
Short selling is most often done with instruments traded in public securities, futures or currency markets, because of the liquidity and real-time price distribution characteristics of those markets and because the instruments defined in each class are interchangeable.
In practical terms, "short" can be considered the opposite of conventional "long-standing" practices, in which an investor benefits from an asset price increase. Mathematically, the return of short positions equates to having (to "long") a number of negative instruments. (However, one major difference in the short term to long positions is that short positions should exclude paid dividends, if any.)
Short sales may have many purposes. Speculators can sell briefly in hopes of realizing gains on instruments that look too high, just as investors or speculators expect to benefit from rising prices of seemingly undervalued instruments. Traders or fund managers can hedge long positions or portfolios through one or more short positions.
Unlike traditional traders who start "buy low, sell high", short sellers start "sell high, buy low", or even "buy high, sell low" when this purchase is actually "on credit".
Research shows that prohibiting short selling is not effective and has a negative effect on the market. However, short sales are subject to criticism and regularly face hostility from the public and policy makers.
Video Short (finance)
Drafts
The following example describes a brief sale of security. To benefit from a decrease in the price of securities, short sellers can borrow securities and sell them in the hope that they will be cheaper to buy back in the future. When the seller decides that the time is right (or when the lender remembers the securities), the seller purchases the equivalent securities and returns them to the lender. The process depends on the fact that securities (or other assets sold for short) can be exchanged; the term "borrow" is therefore used in the sense of borrowing cash, where different bank notes or coins can be returned to the creditor (as opposed to borrowing a car, where the same car must be returned).
Short sellers usually borrow through brokers, who usually hold securities to other investors who have securities; the broker itself seldom buys securities to lend to short sellers. The lender does not lose the right to sell securities when they have been lent, as the broker usually holds a large pool of such securities to a number of investors who, because the securities are exchangeable, may instead be transferred to any buyer. In most market conditions there is a supply of securities ready to be borrowed, held by pensions, mutual funds and other investors.
The act of buying back short-sold securities is called "short cover" or "cover position". Short positions can be closed anytime before the securities are returned. After the position is covered, the short seller is not affected by the subsequent increase or decrease in the price of the securities, as he already holds the necessary securities to repay the creditor.
Short selling refers broadly to any transactions used by investors to benefit from a decrease in the price of a borrowed asset or financial instrument. But some short positions, such as those done by way of derivative contracts, are technically not short because no underlying asset is actually delivered at the time of initiation of the position. Derivative contracts include futures, options, and swaps.
Work example
Profitable trading
Shares in ACME Inc. is currently trading at $ 10 per share.
- Short-term investor borrows from 100 ACME Inc. stock lenders. and immediately sell it for a total of $ 1,000.
- Next, the stock price drops to $ 8 per share.
- Short sellers now purchase 100 shares of ACME Inc. for $ 800.
- The short seller returns the shares to the lender, who must receive the same amount of shares return as lent despite the fact that the market value of the stock has decreased.
- The short seller's profit of the difference of $ 200 (minus the cost of borrowing) between the price when the seller short sells the stock, the borrowed, and the lower price at which the short seller repurchases the sold shares.
Profitable closed trade
Shares in ACME Inc. is currently trading at $ 10 per share.
- Short seller investors own 100 shares of ACME Inc. and sell it for a total of $ 1,000.
- Next, the stock price drops to $ 8 per share.
- Short sellers now purchase 100 shares of ACME Inc. for $ 800, or alternatively, bought 125 shares for $ 1,000.
- Short sellers retain earnings by a $ 200 difference between the price when the seller short sells the owned shares and the lower price at which the short seller can buy back the stock.
Commerce gain loss
Shares in ACME Inc. is currently trading at $ 10 per share.
- Short sellers borrow 100 shares of ACME Inc. and immediately sell it for a total of $ 1,000.
- Next, the stock price goes up to $ 25.
- Short salesmen needed to return shares, and were forced to buy 100 shares of ACME Inc. for $ 2,500.
- The short seller returns the shares to the creditor who receives the same return on the same amount as the loan.
- The short seller incurs a loss of $ 1,500 between the price when he sells the borrowed shares and the higher price on which the short seller must buy back the stock (plus the borrowing costs).
Maps Short (finance)
History
The practice of short sale was most likely discovered in 1609 by the Dutch businessman, Isaac Le Maire, a sizable shareholder of the Dutch East India Company (Vereenigde Oostindische Compagnie or VOC in Dutch). Edward Stringham has written extensively on the development of sophisticated contracts on the Amsterdam Stock Exchange in the seventeenth century, including short sales contracts. Short selling can put downward pressure on the underlying stock, lowering the stock price of the securities. This, combined with seemingly complex and difficult-to-follow tactics, has made short sales of historical targets for criticism. At various times in history, the government limits or prohibits short sales.
London's Neal, James, Fordyce and Down's housing houses collapsed in June 1772, sparking a major crisis that included the collapse of virtually every private bank in Scotland, and a liquidity crunch in two of the world's major banking centers, London and Amsterdam.. The Bank has been speculating with shorting of East India Company stock on a large scale, and appears to use customer deposits to cover losses. It was regarded as having a magnifying effect in the decline of violence in the Dutch tulip market in the eighteenth century. In another well-referenced example, George Soros became famous for "breaking the Bank of England" on Black Wednesday 1992, when he sold a shorter worth of $ 10 billion pounds sterling.
The term "short" was used from at least the middle of the nineteenth century. It is generally understood that "short" is used because the short-seller is in a deficit position with his broker house. Jacob Little was known as The Great Bear of Wall Street who began shorting stock in the United States in 1822.
Short sellers were blamed for Wall Street Crash in 1929. The rules governing short sales were carried out in the United States in 1929 and in 1940. The political collapse of the 1929 collision led to Congress enacting laws prohibiting small sellers selling shares during downtick; this is known as an uptick rule, and this is valid until 3 July 2007 when it is removed by the Securities and Exchange Commission (SEC Release No. 34-55970). President Herbert Hoover cursed the small seller and even J. Edgar Hoover said he would investigate short sellers for their role in prolonging the Depression. A few years later, in 1949, Alfred Winslow Jones established an unregulated fund that bought stocks while selling other short stocks, thus protecting some of the market risk, and a hedge fund was born.
Negative news, such as litigation against companies, can also attract professional traders to sell their shares in the hope that stock prices will fall.
During the dot-com bubble, short start-up companies can backfire as it can be taken over at a price higher than the price when the speculator is shorted. Short sellers are forced to close their positions at cost, while in many cases companies often pay too much for a start.
Short Limit sales limit
During the 2008 financial crisis, critics argue that investors are taking short positions in struggling financial firms such as Lehman Brothers, HBOS and Morgan Stanley creating instability in the stock market and putting additional pressure on prices. In response, a number of countries introduced regulations that limited short sales in 2008 and 2009. Unintended short selling is the practice of short selling tradable assets without first borrowing security or ensuring that security can be borrowed - this is usually a restricted practice. Investors argue that it is a weakness of financial institutions, not short-selling, which pushed stocks down. In September 2008, the Stock Exchange Commission in the United States suddenly banned short sales, especially in financial stocks, to protect companies under siege on the stock market. The ban came to an end a few weeks later when regulators stipulated the ban did not stabilize share prices.
A temporary short-selling ban was also introduced in the UK, Germany, France, Italy and other European countries in 2008 for minimal effects. Australia moved to ban a bare short sale entirely in September 2008. Germany placed a ban on the short sale of eurozone securities in 2010. Spain, Portugal and Italy introduced a ban on short sales in 2011 and again in 2012. Worldwide, the economic regulator seems tend to limit short sales to lower the potential for price cascades downward. Investors continue to argue this only contributes to market inefficiency.
Mechanism
Short sales shares consist of the following:
- Speculators instruct the broker to sell the shares and the results are credited to the brokerage account at the company, where the company can earn interest. Generally, short sellers do not earn interest on short sales results and can not use or overload sales proceeds for other transactions.
- Upon the completion of the sale, investors usually have limited time (for example, 3 days in the US) to borrow shares. If required by law, the investor first ensures that cash or equity on deposits with the brokerage company as a guarantee for the initial short margin requirements. Some short sellers, especially companies and hedge funds, participate in a short sales practice, in which short-listed stocks are not borrowed or shipped.
- Speculators can close positions by repurchasing shares (called cover). If the price has dropped, he gets a profit. If stock goes ahead, he takes a loss.
- Finally, the speculator can return the stock to the creditor or remain unlimited.
- At any time, the lender may request the return of his shares, for example, because he wants to sell it. The borrower must buy the stock in the market and return it to the creditor (or he must borrow the stock from somewhere else). When the broker completes this transaction automatically, it is called 'buy-in'.
Short selling shares work together by buying by margin, therefore also require a margin account as well:
Shorten stock in the US.
To sell shares in the US, the seller must arrange a broker-dealer to confirm that it can deliver short-term securities. This is referred to as search. Brokers have various ways to borrow shares to facilitate location and make good on the shorted security shipments.
Most of the shares borrowed by US brokers come from loans made by leading detention banks and fund management companies (see list below). Agencies often lend their shares to get additional money on their investments. This institutional loan is usually governed by a securities holding custodian for the institution. In an institutional share loan, the borrower places cash collateral, usually 102% of the value of the stock. The cash security is then invested by the lender, who often rebates part of the interest to the borrower. The interest deposited by the lender is compensated to the lender for a stock loan.
Brokerage firms can also borrow shares from their own customer accounts. A typical margin account agreement gives the brokerage company the right to borrow a customer's share without notifying the customer. Generally, brokerage accounts are only allowed to lend shares from accounts in which the customer has a debit balance , which means they have borrowed from the account. SEC Regulation 15c3-3 imposes very strict restrictions on borrowing of shares from cash accounts or excess margins (paid in full) from margin accounts that most brokerage firms do not interfere except in rare circumstances. (This restriction includes that the broker must have permission from the customer and provide a guarantee or letter of credit.)
Most brokers allow retail customers to borrow shares into short stocks only if one of their own customers has bought the stock by margin. Brokers go through a "search" process outside their own company to get shares borrowed from other brokers only for their large institutional customers.
Stock markets such as the NYSE or NASDAQ usually report "short interest" of the stock, which gives the number of shares that have been legally sold short as a percent of the total float. Alternatively, this can also be expressed as a short interest rate, which is the number of shares legally sold short as a multiple of the average daily volume. This can be a useful tool to see trends in stock price movements but in order for them to be reliable, investors should also ensure the number of shares brought by short shorters. Speculators are warned to remember that for every part that has been shortened (owned by the new owner), a 'shadow owner' exists (ie, the original owner) who is also part of the stock owner's universe, ie, even if he has no voting rights did not give up his interest and some rights in the stock.
Securities lending
When security is sold, the seller on a contractual basis is required to ship it to the buyer. If the seller sells security briefly without owning it first, the seller must borrow security from a third party to fulfill its obligations. Otherwise, the seller failed to send, the transaction did not complete, and the seller may be subject to a claim from his/her counterpart. Holders of certain large securities, such as custodial firms or investment management, often lend these securities to earning extra income, a process known as securities loans. Giver accepts fees for this service. Similarly, retail investors can sometimes make additional fees when their broker wants to borrow their securities. This is only possible when the investor has a full security certificate, so it can not be used as collateral for margin purchases.
Short interest data source
Time delayed short interest data (for legally shorted shares) is available in a number of countries, including US, UK, Hong Kong, and Spain. The number of globally shortened stocks has increased in recent years for various structural reasons (for example, growth of type 130/30 strategy, short ETF or bear). Data is usually delayed; for example, NASDAQ requires dealer brokerage firms to report data on the 15th of each month, and then publish a compilation eight days later.
Some market data providers (such as Data Explorers and SunGard Financial Systems) believe that stock lending data provides good proxy for short interest rates (excluding bare flowers altogether). SunGard provides daily data with short interest by tracking proxy variables based on loan data and borrowing it collects.
Short sale requirements
Days to Cover (DTC) is a numerical term that describes the relationship between the number of shares in a particular equity that has been legally sold short and the number of days of typical trade that would be required to 'cover 'all the incredible short legal positions. For example, if there are ten million shares of XYZ Inc. which is currently legally short-sold and the daily average daily volume of XYZ shares traded daily is one million, it will take ten trading days for all short positions of the law to be covered (10 million/1 million).
Short Interest is a numerical term that relates the number of shares in a given equity that has been legally shortened divided by the total shares outstanding for the firm, usually expressed as a percent. For example, if there are ten million shares of XYZ Inc. which is currently legally short sold, and the total number of shares issued by the company is one hundred million, the Short Interest is 10% (10 million/100 million). However, if stocks are made through short sales, "failed" data must be accessed to accurately assess the actual interest rate.
Borrowing costs are fees paid to securities lenders to borrow shares or other security. The cost of stock borrowing is usually negligible compared to the fees paid and the interest accruing on the margin account - in 2002, 91% of the shares may be shortened by less than 1% of the cost per year, generally lower than the interest rate earned from the margin. However, certain shares become "difficult to borrow" because shareholders willing to lend their shares become more difficult to find. The cost of borrowing these shares can be significant - in February 2001, Krispy Kreme's (short) stock borrowing costs reached 55% annually, suggesting that short sellers need to pay the lender more than half the stock price over the course of the year, essentially as interest to borrow stocks in limited inventory. This has important implications for pricing and derivative strategies, as the cost of the loan itself can be a significant comfort for holding a stock (similar to an additional dividend) - for example, a broken put-call parity relationship and an optional initial call feature on a stock those who do not pay dividends can be rational to do the exercises earlier, which otherwise would not be economical.
Prime lender
- State Street Corporation (Boston, United States)
- Merrill Lynch (New Jersey, United States)
- JP Morgan Chase (New York, United States)
- Northern Trust (Chicago, United States)
- Fortis (Amsterdam, Netherlands, now dead)
- ABN AMRO (Amsterdam, Netherlands, formerly Fortis)
- Citibank (New York, United States)
- Bank of New York Mellon Corporation (New York, United States)
- UBS AG (Zurich, Switzerland)
- Barclays (London, United Kingdom)
Naked short sale
A naked short sale occurs when security is sold shortly without borrowing security within the stipulated time (for example, three days in the US.) This means that the short buyer buys a short seller's promise to give a share, rather than buying the part itself. The promise of a short-seller is known as the hypothesized part.
When the underlying shareholder receives a dividend, the hypothesized shareholder will receive the same dividend from the short seller.
A naked perspective has been made illegal unless permitted in limited circumstances by market makers. This is detected by Depository Trust & amp; Clearing Corporation (in the US) as "failure to deliver" or "failure". While many failures are completed in a short time, some have been allowed to linger in the system.
In the US, set to borrow security before a short sale is called search . In 2005, to prevent the widespread failure of securities transfers, the US Securities and Exchange Commission (SEC) enacted a SHO Rule, which is intended to prevent speculators from selling small shares before searching. More stringent requirements were introduced in September 2008, as if to prevent the practice of aggravating the market downturn. The regulation was made permanent in 2009.
Cost
When the broker facilitates the delivery of the client's short sale, the client is charged for this service, usually a standard commission similar to the same security purchase.
If short positions start moving against short position holders (ie, the price of securities starts to rise), money is removed from the holders cash balance and transferred to their margin balance. If the short stock continues to increase in price, and the holder does not have sufficient funds in the cash account to close the position, the holder begins to borrow at the margin for this purpose, thus subject to interest margin fee. This is calculated and charged the same as for other margin debits. Therefore, only margin accounts can be used to open short positions.
When the ex-dividend date of the securities passes, the dividend is deducted from the account of the registrar and is paid to the person who borrowed the shares.
For some brokers, short sellers may not earn interest on short sales results or use them to reduce margin margins. This broker may not provide this benefit to retail clients unless the client is very large. The flowers are often broken down with security lenders.
Dividend and voting rights
Where the stock has been shortened and the issuing company shares dividends, the question arises who receives the dividend. New buyers of shares, who are record holders and hold shares directly, receive dividends from companies. However, the lender, who may hold his shares in the margin account with the main broker and is unlikely to realize that certain shares are being lent to shorting, also expect to receive dividends. Therefore the short seller pays the lender an amount equal to the dividend to compensate - although technically, since this payment is not from the company, it is not a dividend. The short seller was therefore referred to as a short dividend .
A similar issue arises with the inherent voting rights of shorted shares. Unlike dividends, voting rights can not be legally synthesized and therefore buyers of the deductible stock, as the record holder, control the voting rights. The owner of the margin account from which the lentable shares were previously approved to waive voting rights for the shares during the short sale period.
As mentioned earlier, short-ending victims sometimes report that the number of votes given is greater than the number of shares issued by the company.
Market
Futures and options
When futures trading, 'short' means having a legal obligation to give something to the expiration of the contract, even though the short positions holders may alternately buy back the contract before it expires rather than make a delivery. Short-term transactions are often used by commodity producers to fix the price of future goods they have not yet produced. Shortening futures contracts are sometimes also used by those who hold the underlying asset (ie those with long positions) as temporary hedges against price reductions. Short term futures can also be used for speculative trading, in which case investors are looking for profit from falling futures contract price before maturity.
Investors can also buy the put option, giving investors the right (but not the obligation) to sell the underlying asset (such as stock shares) at a fixed price. In the event of a market decline, the option holder may exercise the put option, requiring the other party to buy the underlying asset at an agreed (or "strike") price, which will then be higher than the quoted spot price of the asset.
Currency
Selling short on the currency market is different from selling short on the stock market. Currencies are traded in pairs, each currency is priced in another currency. In this way, a short sale in the currency market is identical to going long on stock.
Beginner traders or stock traders can be confused by the failure to recognize and understand this: a contract is always long in terms of one medium and another short.
When the exchange rate changes, the trader buys the first currency again; this time he got more, and paid back the loan. Because he got more money than he initially borrowed, he made money. Of course, the reverse can happen.
Examples are as follows: Let's say traders want to trade with US dollars and Indian rupee currencies. Assume that the current market rate is USD 1 to Rs.50 and traders borrow Rs.100. With this, he buys USD 2. If the next day, the conversion rate becomes USD 1 to Rs.51, then the merchant sells USD 2 and gets Rs.102. He returns Rs.100 and keeps Rs.2 profit (minus cost).
People can also take short positions in currencies using futures or options; previous methods were used to bet on spot prices, which were more directly analogous to selling short stocks.
Risk
Note: this section does not apply to the currency market.
Short selling is sometimes referred to as a "negative revenue investment strategy" because there is no potential for dividend income or interest income. Stocks last only long enough to be sold on a contract basis, and the return of a person is therefore limited to the acquisition of short-term capital, which is taxed as ordinary income. For this reason, buying shares (called "going long") has a very different risk profile from short sales. Furthermore, the "long" loss is limited because the price can only go down to zero, but the profit is not, as there is no limit, in theory, about how high the price can go up. On the other hand, the possibility of short seller gain is limited to the original price of the stock, which can only go down to zero, while the potential loss, again in theory, has no limit. For this reason, short selling may be most often used as a hedging strategy to manage long-term investment risks.
Many short sellers place a stop order with their stockbrokers after selling short stocks - orders to a broker to close a position if the stock price has to rise to a certain level. This is to limit losses and avoid the problem of unlimited liability described above. In some cases, if stock prices rocket, a stockbroker may decide to close short positions immediately and without their consent to ensure that short sellers can repay their shares.
Short sellers should be aware of the potential for short pressure. When a stock's price goes up significantly, some people who clear stocks close their positions to limit their losses (this can happen in an automated way if short sellers have a stop-loss order with their broker); others may be forced to close their positions to meet margin calls; others may be forced to cover up, subject to the conditions under which they borrow shares, if the person who lends the stock wants to sell and make a profit. Because of their cover position involving stock purchases, short pressure causes an increasing stock price increase, which in turn can trigger an additional closure. Therefore, most short sellers limit their activity to massively traded stocks, and they monitor the "short-interest" rate of their short-term investments. Short interest is defined as the total number of shares that have been legally sold short, but not covered. Short squeeze can be intentionally induced. This can happen when a large investor (such as a company or a rich person) sees a significant short position, and buys a lot of stocks, with the intention of selling a position on the earnings to a short seller, who may panic by an early uptick or who is forced to cover their short position for avoid call margin.
Another risk is that the stock given may be "difficult to borrow." As defined by the SEC and based on lack of availability, brokers may charge a difficult fee to borrow daily, without notice, for each day that the SEC declares shares difficult to borrow. In addition, the broker may be required to cover the short seller's position at all times ("buy"). The short seller receives a warning from the broker that he "failed to deliver" the stock, leading to a buy-in.
Because the short sellers end up having to send the shortened securities to their broker, and need the money to buy it, there is a credit risk for the broker. The penalty for failure to give a short sales contract inspires the financier Daniel Drew to warn: "He who sells what is not his, Must buy it back or go to prism." To manage its own risks, brokers require short sellers to keep margin accounts, and charge interest between 2% and 8% depending on the amount involved.
In 2011, the eruption of large-scale Chinese stock fraud on North American equity markets carries a risk associated with light for short sellers. The research-oriented small-scale seller's effort to expose the fraud ultimately prompted the NASDAQ, NYSE, and other exchanges to enact a long-term and abrupt trade that froze stock values ​​abbreviated to artificially high values. Reported in some cases, brokers pick up small sellers with too large interest based on this high value because shorts are forced to resume their loans at least until the termination is lifted.
Short sellers tend to make exaggerated valuations by selling into excitement. Likewise, short sellers are said to provide price support by buying when negative sentiment is exacerbated after significant price reductions. Short selling can have negative implications if causing premature or unwarranted stock prices to collapse when the fear of cancellation due to bankruptcy becomes contagious.
Strategy
Hedging
Hedging often represents a way of minimizing risk from a series of more complex transactions. The example is:
- A farmer who has just grown his wheat wants to lock in prices where he can sell after harvest. He will take a short position on wheat futures.
- A market maker in corporate bonds constantly trades bonds when clients want to buy or sell. This can create a substantial bond position. The biggest risk is that the overall interest rate moves. Traders can hedge this risk by selling short government bonds to their buy position in corporate bonds. In this way, the remaining risk is the credit risk of corporate bonds.
- The option trader can reduce the stock in order to remain neutral so that it is not exposed to risk of price movements in the underlying stock of his choice Arbitrage
- An arbitrageur who buys long-term contracts on the security of US Treasury, and sells brief security underlying US Treasury.
- Anthony Elgindy
- The Big Short
- Reversed exchange-traded funds
- James Chanos
- Joseph Parnes
- Magnetar Capital
- Manuel P. Asensio
- Margin
- Repurchase agreement
- Socially Responsible Investment
- Straddle
- Sloan, Robert. Do not Blame Short Pants: Why Sellers Always Blame for Market Fluctuations and Why History Repeats Itself , (New York: McGraw-Hill Professional, 2009). ISBN: 978-0-07-163686-5
- Wright, Robert E. Fubarnomik: A Lighthearted, Serious Look at the Ills of the American Economy , (Buffalo, N.Y.: Prometheus, 2010). ISBN 978-1-61614-191-2
- Fleckner, Andreas M. 'Set Trade Practices' at Oxford Regulation of Financial Regulations (Oxford: Oxford University Press, 2015). ISBN 978-0-19-968720-6
- Porsche VW Shortseling Scandal
- Short-Selling Bans Dampen 130/30 Strategies Worldwide, "Global Investment Technology, 29 September 2008
- SEC Naked Short Sales Discussion
Short sellers may try to take advantage of market inefficiencies that arise from a particular product price error. An example is this
Against the box
One variant of short selling involves long positions. "Short sell against the box" consists of holding long positions where the stock has risen, whereby one then enters a short sell order for the same number of shares. The term box alludes to the days when the safe deposit box was used to store (long) shares. The purpose of this technique is to lock the paper profit in long positions without having to sell the position (and may be taxed if the position has been appreciated). Once a short position has been entered, it serves to balance the long positions taken earlier. So, from that point in time, profits are locked inside (brokerage costs are less and financing costs are short), regardless of further fluctuations in the underlying share price. For example, one can ensure profits in this way, while delaying sales until the next tax year.
US investors who consider doing a "short against the box" transaction should be aware of the tax consequences of this transaction. Unless certain conditions are met, the IRS considers a "short of box" position as a "constructive sale" of long positions, which is a taxable event. These conditions include the requirement that short positions be closed within 30 days of the end of the year and that investors should hold their long positions, without including a hedging strategy, at least 60 days after the short position has been closed.
Rule
United States
The Securities and Exchange Act of 1934 gives the Securities and Exchange Commission the power to organize short sales. The first official limitation on short selling took place in 1938, when the SEC adopted a rule known as an uptick rule dictating that short sales can only be made when a particular stock price is higher than its previous trading price. The uptick rule aims to prevent short sales from causing or aggravating market price reductions. In January 2005, the Securities and Exchange Commission enacted a SHO Rule to target rough nude sales. The SHO Rules are the first SEC renewals for short sale restrictions since the uptick rule in 1938.
The rule contains two main components: "place" and "close". The search component tries to reduce the failure to give effect by requiring the broker to have or have arranged to have the shares borrowed. The close-out component requires the broker to send shares to be shortened. In the US, an initial public offering (IPO) can not be sold for a month after they start trading. This mechanism exists to ensure the level of price stability during the initial trading period of the company. However, some brokerage firms specializing in penny stocks (referred to as day-to-day as a bucket shop) have used a lack of short sales during the month to pump and dispose of thinly traded IPOs. Canada and other countries allow the sale of IPOs (including US IPOs) short.
The Securities and Exchange Commission initiated a temporary ban on short selling on 799 financial stocks from September 19, 2008 to October 2, 2008. A larger penalty for short shorts, by requiring the delivery of shares at clearing time, was also introduced. Several state governors have urged state pension agencies to refrain from lending shares for shorting purposes. Assessment of temporary bans on short sales in the United States and other countries after the financial crisis indicates that it is only "slightly impacting" on stock movements, with share prices moving in the same way. because they will move however, but the ban reduces volume and liquidity. Europe, Australia and China
In the UK, the Financial Services Authority has a moratorium on the short sale of 29 leading financial stocks, effective from 2300 GMT, September 19, 2008 to January 16, 2009. After the ban was lifted, John McFall, chairman of the Financial Options Committee, Council of Commons, made clear in public statements and letter to OJK that he believes it should be extended. Between 19 and 21 September 2008, Australia banned temporary short-term sales, and then placed an unlimited ban on short sales. Australia's ban on short sales was extended again for 28 days on October 21, 2008. Also during September 2008, Germany, Ireland, Switzerland and Canada banned short selling of leading financial stocks, and France, the Netherlands and Belgium banned the sale of short-lived financial shares. Unlike the approach taken by other countries, Chinese regulators respond by allowing short sales, along with other market reform packages.
Short sales views
Short sales advocates argue that the practice is an important part of the price discovery mechanism. Financial researchers at Duke University said in a study that short interest is a bad performance indicator of future stocks (self-fulfilling aspects) and that short sellers are exploiting market errors about corporate fundamentals.
Investors noted such as Seth Klarman and Warren Buffett say that short sellers are helping the market. Klarman argues that short sellers are a useful counterweight to the bullish rise on Wall Street, while Buffett believes that short sellers are useful in uncovering fraudulent accounts and other issues in the company.
Shortseller James Chanos received widespread publicity when he was an early critic of Enron's accounting practices. Chanos responds to a brief sales critique by pointing out the important role they play in identifying problems at Enron, Boston Market, and other "financial disasters" over the years. In 2011, the research-oriented small salesperson is widely recognized to expose Chinese stock fraud.
Commentator Jim Cramer has expressed concern about short selling and started a petition calling for the reintroduction of the uptick rule. Books like Robert Sloan's Do not Blame the Short Pants
Individual short sellers have been the subject of criticism and even litigation. Manuel P. Asensio, for example, was involved in a long legal battle with pharmaceutical producer Hemispherx Biopharma.
Several studies on the effectiveness of the short sale ban suggest that a short sales ban does not contribute to more moderate market dynamics.
See also
Note
References
External links
Source of the article : Wikipedia
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