Short Selling Transaction

A Short Selling Transaction is a financial security transaction where the seller sells borrowed shares because of their bearish economic prediction that they will be able to buy them back at a lower price in the future.

• Context:
  • It can (often) require the Short Seller to post margin as collateral to the broker or Counterparty.
  • It can be a strategy against an Overvalued Resource.
  • It can be a Borrowing-Supported Short Selling Transaction.
  • It can (often) involve the Short Seller (who pays a fee to borrow the shares and reimbursing the lender for any dividends received during the transaction).
  • It can be executed through various methods, including "physical" selling short, futures, forwards, options, and swaps.
  • It can be used by Speculators to profit from a decrease in an asset's price or by traders to hedge against risk.
  • ...
• Example(s):
  • a GameStop Short Sell of GameStop stock in anticipation of a price drop due to market overvaluation.
  • a Short Selling of Bonds of corporate bonds in anticipation of a price drop due to rising interest rates.
  • a Naked Short Sale of technology stocks in anticipation of a price drop due to market speculation.
  • a Short Selling of Mortgage-Backed Securities of mortgage-backed securities in anticipation of a price drop due to the collapse of the United States housing bubble.
  • a Credit Default Swap transaction of subprime mortgage loans in anticipation of a price drop due to increased default rates.
  • ...
• Counter-Example(s):
  • a Security Buy Transaction.
  • a Long Equity Position in equities or bonds.
• See: Security (Finance), Financial Instrument, Counterparty, Financial Market, Fungibility, Long (Finance), Speculation, Short Squeeze.

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References

2024

• (Wikipedia, 2024) ⇒ https://en.wikipedia.org/wiki/Short_(finance) Retrieved:2024-2-3.
  • In finance, being short in an asset means investing in such a way that the investor will profit if the value of the asset falls. This is the opposite of a more conventional "long" position, where the investor will profit if the value of the asset rises.

    There are a number of ways of achieving a short position. The most fundamental method is "physical" selling short or short-selling, which involves borrowing assets (often securities such as shares or bonds) and selling them. The investor will later purchase the same number of the same type of securities in order to return them to the lender. If the price has fallen in the meantime, the investor will have made a profit equal to the difference. Conversely, if the price has risen then the investor will bear a loss. The short seller must usually pay a fee (handling fee) to borrow the securities (charged at a particular rate over time, similar to an interest payment), and reimburse the lender for any cash returns such as dividends that were due during the period of lease.

    Short positions can also be achieved through futures, forwards or options, where the investor can assume an obligation or a right to sell an asset at a future date at a price that is fixed at the time the contract is created. If the price of the asset falls below the agreed price, then the asset can be bought at the lower price before immediately being sold at the higher price specified in the forward or option contract. A short position can also be achieved through certain types of swap, such as contracts for differences. These are agreements between two parties to pay each other the difference if the price of an asset rises or falls, under which the party that will benefit if the price falls will have a short position.

    Because a short seller can incur a liability to the lender if the price rises, and because a short sale is normally done through a broker, a short seller is typically required to post margin to its broker as collateral to ensure that any such liabilities can be met, and to post additional margin if losses begin to accrue. For analogous reasons, short positions in derivatives also usually involve the posting of margin with the counterparty. Any failure to post margin promptly would prompt the broker or counterparty to close the position.

    Short selling is an especially systematic and common practice in public securities, futures or currency markets that are fungible and reasonably liquid.

    A short sale may have a variety of objectives. Speculators may sell short hoping to realize a profit on an instrument that appears overvalued, just as long investors or speculators hope to profit from a rise in the price of an instrument that appears undervalued. Alternatively, traders or fund managers may use offsetting short positions to hedge certain risks that exist in a long position or a portfolio.

    Research indicates that banning short selling is ineffective and has negative effects on markets. Nevertheless, short selling is subject to criticism and periodically faces hostility from society and policymakers.

2015

• (Wikipedia, 2015) ⇒ http://en.wikipedia.org/wiki/short_(finance) Retrieved:2015-7-25.
  • In finance, short selling (also known as shorting or going short) is the practice of selling securities or other financial instruments that are not currently owned, and subsequently repurchasing them ("covering"). ...

2013

• http://www.investopedia.com/university/shortselling/shortselling1.asp
  • QUOTE: ... Short selling is the selling of a stock that the seller doesn't own. More specifically, a short sale is the sale of a security that isn't owned by the seller, but that is promised to be delivered. That may sound confusing, but it's actually a simple concept. (To learn more, read Benefit From Borrowed Securities.)

    ... when you short sell a stock, your broker will lend it to you. The stock will come from the brokerage's own inventory, from another one of the firm's customers, or from another brokerage firm. The shares are sold and the proceeds are credited to your account. Sooner or later, you must "close" the short by buying back the same number of shares (called covering) and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, you have to buy it back at the higher price, and you lose money.

2010

• (Lewis, 2010) ⇒ Michael Lewis. (2010). “The Big Short: Inside the Doomsday Machine.” W. W. Norton \& Company.

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