Short Selling
| Short Selling | | Working, Dynamics and Opinions |
FIM – Spring 2011
Authored by: Muhammad Fahad Raza & Muneeb Shahid
Short Selling
Working, Dynamics and Opinions
Contents
What is Short Selling? 2
History 2
Working 2
Dynamics 3
Factors Influencing the Short Selling Process 3
Pure Intuition 3
Market Correction 3
Inside Information 3
Advantages of Short Selling 4
Disadvantages of Short Selling 4
Short Selling in US 5
Short Selling in Pakistan (ISE) 6
What is Short Selling?
Short selling is a trade activity in which a short seller typically borrows through a broker, who is usually holding the securities for another investor (owner of the securities); and then on the basis of his estimates or speculations, sells the securities in the market-hoping for the price to fall. The trader eventually buys the stock back, making money if the price fell in the meantime and losing money if prices rose and the lender charges a borrowing fee on the borrowed stocks from the short seller. In many markets short selling is heavily regulated.
History
Some theories hold that the practice was invented in 1609 by Dutch trader Isaac Le Maire, a big shareholder of the Vereenigde Oostindische Compagnie (VOC). In 1602, he invested about 85,000 guilders in the VOC. By 1609, the VOC still was not paying dividend, and Le Maire’s ships on the Baltic routes were under constant threats of attack by English ships due to trading conflicts between the British and the VOC. Le Maire decided to sell his shares and sold even more than he had; this was the first documented case of short selling.
Working
Dynamics
Factors Influencing the Short Selling Process
Some factors, which effect the initiation and execution of short selling, are discussed below:
Pure Intuition
This means that the short seller has adequate knowledge about the stock market and its behavior in recent past. He is then able to speculate the trends the market is going to follow in near
FIM – Spring 2011
Authored by: Muhammad Fahad Raza & Muneeb Shahid
Short Selling
Working, Dynamics and Opinions
Contents
What is Short Selling? 2
History 2
Working 2
Dynamics 3
Factors Influencing the Short Selling Process 3
Pure Intuition 3
Market Correction 3
Inside Information 3
Advantages of Short Selling 4
Disadvantages of Short Selling 4
Short Selling in US 5
Short Selling in Pakistan (ISE) 6
What is Short Selling?
Short selling is a trade activity in which a short seller typically borrows through a broker, who is usually holding the securities for another investor (owner of the securities); and then on the basis of his estimates or speculations, sells the securities in the market-hoping for the price to fall. The trader eventually buys the stock back, making money if the price fell in the meantime and losing money if prices rose and the lender charges a borrowing fee on the borrowed stocks from the short seller. In many markets short selling is heavily regulated.
History
Some theories hold that the practice was invented in 1609 by Dutch trader Isaac Le Maire, a big shareholder of the Vereenigde Oostindische Compagnie (VOC). In 1602, he invested about 85,000 guilders in the VOC. By 1609, the VOC still was not paying dividend, and Le Maire’s ships on the Baltic routes were under constant threats of attack by English ships due to trading conflicts between the British and the VOC. Le Maire decided to sell his shares and sold even more than he had; this was the first documented case of short selling.
Working
Dynamics
Factors Influencing the Short Selling Process
Some factors, which effect the initiation and execution of short selling, are discussed below:
Pure Intuition
This means that the short seller has adequate knowledge about the stock market and its behavior in recent past. He is then able to speculate the trends the market is going to follow in near