Talk:Short (finance)

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Merge. The articles should be merged, as both discuss near identical topics. It would be better to make Short Selling a section of Short (finance), though. Just my 2 cents. --Michaelk 14:03, 30 August 2006 (UTC)

  • Agree (suggest reverse merge). I'm for the merge, but perhaps it would be better to merge Short selling into Short (finance). "To short" covers buying, holding, and selling. -- Isogolem 19:19, 24 October 2006 (UTC)
Retract suggestion per EncMstr's comment below. -- Isogolem 19:01, 25 October 2006 (UTC)
  • Merge. I don't particularly care which one is the redirect and which one is the article, but I count 26 main space wikilinks for short (finance) and 89 for short selling. — EncMstr 17:01, 25 October 2006 (UTC)
  • Disagree. It's important to recognize the distinctions between a short view and short selling. They're not always the same thing. A short view of market as a whole or a sector, and you really can't buy a market or sector (don't even start about ETFs). You don't have to have a short position to have a short view. Personally, I think that the short selling section on this page should be shortened to bring the article in line with the Long (finance) article. --Srwm4 08:11, 4 December 2006 (UTC)
  • Merge Completed Gentlemen, I completed the merge and transcluded the referenced facts from the other article. Anyone interested in integrating further content may find the merged page at [1]. Alan.ca 07:39, 6 January 2007 (UTC)

Contents

[edit] Covering a short position

Hypothetical scenario:

I buy 100 shares of XYZ for 20 a share, and then the price later goes up to 22. I believe that it is possible that it will go down a lot in the near future, so I short 100 shares of XYZ at 22. Instead of going down, however, the stock goes up to 25. Can I use the 100 shares of XYZ that I had originally purchased for 20 a share to cover my short, making a profit of 2 dollars per share? Or do I have to buy another set of 100 shares of XYZ at 25 to cover my short position?

I guess what Im really asking is, when you return the shares to the lender, does it matter when you got those shares? Can you cover a short with a previously held long? —Preceding unsigned comment added by 76.170.213.238 (talk) 04:25, 28 March 2008 (UTC)

-defecator —Preceding unsigned comment added by 76.170.213.238 (talk) 04:21, 28 March 2008 (UTC)


[edit] Removed Joseph Parnes

Removed link that did not appear to be related to the subject. Servalo 15:35, 10 January 2007 (UTC)

[edit] Reasons

This article explains reasons for short selling. It does not however discuss why someone allows their stocks/futures/whatever to be borrowed so that someone else may short them. —The preceding unsigned comment was added by 64.126.82.205 (talk) 22:20, 19 February 2007 (UTC).

Yes, I would like to know this too... it's easy to see how the borrower can profit from shorting, but what does the lender have to gain from this? —Preceding unsigned comment added by 154.32.91.68 (talk) 13:23, 28 September 2007 (UTC)

The lender gets an additional risk-free profit as the borrower has to pay fees. At the same time, the lender keeps getting all the dividend or interest distributions and also the right to sell the security at any time he chooses.--87.245.110.218 (talk) 15:57, 28 February 2008 (UTC)

I don't follow the response from User:87.245.110.218. Are you saying the borrower pays fees to the lender? Also, the lender continuing to get dividends/interest and having the right to sell the security is not a benefit obtained from lending -- the lender had those benefits even without the loan. TJRC (talk) 18:37, 28 February 2008 (UTC)

Yes, the borrower pays fees to the lender, which is why the lender does it. You are right that the lender had those other benefits anyway, but I assume they were mentioned just to illustrate the overall view of the economics of the situation. Also bear in mind that the lender will typically be an investment bank that is in the business of lending out shares for these reasons. Art Markham (talk) 15:32, 18 May 2008 (UTC)

[edit] Short selling merger not completed

Just FYI, for anyone thinking to edit this page, despite what was said above this merger was only attempted not completed. Short selling is still alive and well. —The preceding unsigned comment was added by Isogolem (talk • contribs) 16:39, 20 February 2007 (UTC).

[edit] Added merge templates

I think I'll merge these pages soon. Just in case, I put merge templates up on both Short (finance) and Short selling. Merging the former into the latter looks easier because the latter is longer. --Officiallyover 18:50, 11 May 2007 (UTC)

[edit] Merger is needed

I agree that these two articles need to be merged. I just noticed the template in the other article (I think it was added recently, actually) and am surprised that you have two separate articles on the same subject. I would suggest that this article be merged into Short selling. --Samiharris 17:54, 14 May 2007 (UTC)

[edit] Mechanism

I think this article still needs more clarity. There are basically two methods of selling short. In essence it always involves creating a situation where you have an obligation to give someone an asset when you don't actually have it. This situation can be created by either:

  • making a promise to sell something you don't have at a future date (the original method), or
  • borrowing something from someone in order to return it at a given date in the future and then disposing of it in the meantime.

Once the situation is created, clearly you need to acquire (or re-acquire) at a later date in order to return the asset. You can see that it is very similar in each case when you strip it down, so I don't see why there is such disagreement between the market-orientated writers and the non-market people. The thinking behind each method is a little different.

  • In the first method there are two main reasons to do it. Either it is more convenient to sell before production in order to provide certainty, or, in financial markets, you are making a kind of bet with the other party - he thinks the asset will be worth more at that future date than you do, so he buys it at a higher price than you think it will be worth. If you're right you can enter the market immediately before you owe him the asset and buy it before selling it to him at the sale price, making yourself a profit (and if you're wrong, you lose out).
  • In the second method, well, someone else explain that because my supervisor is returning!

[edit] Short Sale Redirection - Please Correct

Guys can we change the redirection of Short sales going to short selling. Short Sales is seen a advanced real estate technique. A short sale in real estate occurs when the outstanding obligations (loans) against a property are greater than what the property can be sold for, so a investor will negotiate with the bank (or other) and get a discount on the mortgage. The bank benefits as it dosn't have to go through foreclosure (which costs approximalty $32,000 per property, and the investor can make a unprofitable deal profitable).

[edit] Shorting bonds

This article is almost completely about equity trading, although shorting is routinely done in debt markets as well. I will try to get to this sometime. Also, more links are needed to Securities lending and Repo. RobLinwood 00:05, 17 April 2006 (UTC)

[edit] Borrowing Stock

Could someone add as a sub-point under "mechanism" or elsewhere how you "borrow" stock? What's missing from my understanding in all this is how you "borrow" stock in the first place. I thought people traded/bought stock. The entire entry is obfuscating to those who aren't familiar with stock-trading because nothing makes sense after "one borrows stock". To wrap this definition up nicely I hope someone will explain that. If someone comes to the entry with a basic knowledge level of trading, I'm sure it reads well. If not...

You borrow stock just like you borrow money - i.e. someone gives it to you, and you promise to give it back later. The lender is usually an investment bank, who is the business of doing this. Art Markham (talk) 15:36, 18 May 2008 (UTC)

[edit] Futures

  • All I wanted to say was that in futures, short selling is selling a contract “before,” you buy it. That is the essence of the thing.

In order to balance the non-universal explanation I will explain shorting futures as it is mis-explained above. GT

  • In futures, shorting brings with it an obligation to deliver in the future. Sellers are not selling something that they do not own yet, they may be selling something that is not even planted yet. In fact a farmer may have to pre-sell his crop to get the funds for seed. There is no borrowing of any securities like with stocks. The clearinghouse only as a good faith deposit, holds margin. There is no interest or dividends to be paid. There is no deterioration of your capital because of time as there may be with options. When there is no fluctuation in price it does not cost anything to maintain a short futures position. New contracts are only created out of open interest increasing transactions involving a new seller and a new buyer. Selling short futures does not mean that you owe a negative amount of anything. The seller may have it offset with actuals or a long position in something else.

Traders who trade spreads do not hope that prices fall. They may in fact own actuals in greater number than the short position. As when a rancher pre-sells part of his herd by shorting futures. Spread traders may be depending on their shorts to continue going up, just at a slower rate than the long side of the spread. The short side may be just to minimize drawdowns, reduce margin requirements and increase return on margin. It may not be expected to move at all, which is quite common. GT

I have changed the definition for "short futures" to say: "...usually before it is produced or bought."; I hope this is general enough to please everyone here... OwenX 19:57, 27 Jan 2005 (UTC)

It is not a true statement as concerns futures. Suppose you go short to spread a long position in Eurodollars. They are already produced and in this case you are not selling the Eurodollars before they are bought. Futures can be slippery. GT


[edit] Link Spam Removed

Stock Market News - Website providing daily news and tips on stock market selling and trading. Offers tips on short selling.

It reported this address - ttp:/moneyplans.net/

[edit] Obligations to Deliver

Why is this one sentance?

In finance, short selling is selling something that one does not (yet) own. In futures, short implies an obligation to deliver something before it is bought.

The definition “something that one does not (yet) own.” Does not apply to futures. You may already own it. It is a separate explanation so it should be put on a separate line. If you are an expert in finance, I suggest that you clean up your act. If your have expertise in futures, than you can see the absurdity of the connection. It is too limited for U.S. futures markets, as they exist today.

We don’t trade in ownership as much as we trade "obligations," to deliver or receive. These agreements are called contracts. "A contract is any promise or set of promises made by one party to another for the breach of which the law provides a remedy. The promise or promises may be express (either written or oral) or may be implied from circumstances." GT

[edit] Term “short”

the page says, and this is about stocks, it says:

“It is possible that the term "short" derives from the name of a notorious stock broker of the 1920s that used the practice to defraud his customers”

How do you explain:

“ Although the Amsterdam bourse maintained that the decline in the East India stock was due to poor business conditions - not short-selling, in 1610 the government outlawed all short sales. As with most laws seeking to curtail the activities of bears - the market's natural libertarians - this edict was a dead letter from the start. The Dutch banned short-selling again in 1621 but to no effect.” [2]

The Dutch banned short-selling a mere 300 years before your universal short selling page says it originated from defrauding customers. GT

The practice of short selling may have existed under a different name, or without a special name of its own, long before the name "short selling" for this practice was coined. I read the statement about the 1920s as a discussion of the origins of the name, not the origins of the practice.66.203.174.9 14:19, 22 May 2005 (UTC)


The statement on the possible derivation of "short" is wrong and should be removed. The term was in use far earlier, probably going back to the beginnings of the stock exchange. More research would be required to find very early sources for the term, but some examples found online in the NYT archives and other sources include:

"There was unusual activity in Delaware & Hudson, the depression on Saturday by a short sale at 109 bringing in new buyers..." (NYT, March 9, 1852, pg.4)[3]

"The 'cornering' process, or 'getting up a corner,'is the act of a combination of operators, and is always the result of short sales" (Groesbeck, John, The Crittenden commercial arithmetic and business manual, Philadelphia, 1867, pg. 127)[4]

"To 'buy in'. The act of purchasing stock in order to meet a 'short' contract, or to enable one to return stock which has been borrowed." (Medbery, James Knowles, Men and mysteries of Wall street, Boston,: Fields, Osgood & co., 1870, pg. 134)[5] --JJay 13:14, 8 October 2005 (UTC)

[edit] Margin Call

1) I think the term "margin call" should be added:

A demand by a broker for additional funds, additional money or securities, because of an adverse price movement in one or more of your held securities to bring a margin account up to the minimum maintenance margin.

A broker will make a margin call if the price of one or more of the securities you have bought, with borrowed money, moves adversely (usually droping, but rising if shorting) past a certain point.

This is my definition i pieced together in my own words from many sources, it maybe incorrect so could someone please verify it (esp. the adverse part about marginal calls during rising securities during shorting).

2) Also "over-leveraging" is another that should be added, overextending yourself by shorting more then your ability to pay off in the event of a margin call.

ShaunMacPherson

That all looks good, Shaun. Please feel free to add yourself. No-one will bite your head off :).

2) Over extending yourself has nothing to do with weather you are long or short or both long and short. It can also be caused by withdrawing funds from your account or an unexpected drawdown. They can also raise margins on you without prior notice.

Margin calls are just the result of being unable to maintain minimum margin overnight. You can manage margin just by adjusting your position size. GT

[edit] Invalid link - Bear raids

There's this link about Bear Raids and Uptick Rule but theres no atricle on it??

Can some1 pls post it because i wanted to know about it

[edit] Futures, options, spreads

"Why separate between Futures and Options? The two work exactly the same as far as short selling is concerned. Borrowing is just as irrelevant for options as it is for futures. Either add the comment to both, or remove it from both. Goldtrader, what's the obsession with the seasonal spread? If you think spreads don't have a place under this entry, let's take it out too." OwenX

Options main advantage accrues to the seller. Futures are a fair game, 50/50. The advantages we get from shorting futures are not available to option players. You do not understand one side of the other if you think they are exactly the same. My specialty is futures spreads, I can't speak for the options. Correct me where I am wrong. But I do know when someone is slinging it as concerns futures contracts.

I do not know why someone added the borrowing nonsense on there but I am now making it temporarily distinct from stocks also. The whole post is slanted against short sellers as it is. There is nothing negative or non-positive among anyone except pure amateurs about shorting futures. I trade spreads, if anything it’s this slanted anti-shorting baloney that has no place in an encyclopedia.

My obsession is with the mis-information that is perpetrated on the investing public by people how should know better.GT

[edit] Universal and neutral

The previous definition of short selling is out and out wrong. The definition should be universal and neutral. What you have there is a load of mis-information. It is misleading and untrue. It only applies to one small highly regulated use. Maybe you should change the name to something like “short selling (stocks only),” because it sure does not apply to real estate or normal businesses.

The current page says “In order to sell something short, one must borrow it from someone else.” Bill Gates did not have to borrow something from someone else, and he was selling short. How do you explain that?

I can sell 5,000 bushels of November Corn, I do not have to borrow anything. How can this page be true?

When Bill Gates sold an operating system he “did not have,” to IBM. Gates was selling short. He sold something before he bought it. He did not adhere to all these things this writer says. Short selling futures, real estate, and fungible property is a part of the Speculation business and it does not fit the current limited description used under this heading for selling short. GT

[edit] Removed Futures

  • It is clear that stock people do not have a clue about shorting futures GT
  • Whether or not they have a clue, you can't just decide you don't like to hear about it and delete it all. I rewrote the Futures section carefully. It is correct as written; a hundred thousand futures traders (myself included) aren't all wrong calling it "short" just because Mr. GoldTrader said so. Deal with it. OwenX 22:50, 27 Jan 2005 (UTC)

[edit] Speculation

Short Selling may be Speculation but I am not comfortable calling it Category:Investing [GT]

The two are not contradictory; the dictionary defines "investing" as committing money in order to earn a financial return. This means that 'speculating' is just one form of investing. Also, when it comes to categories, terms such as "Capital Loss", "Arbitrage" and even the term "Speculator" are all part of the "Investing" category, since they are all part of the investment world. More specifically, a market-neutral portfolio--which is the preferred investment of many institutional investors--will always contain short positions. There is nothing speculative about it; it is carefully crafted and calculated to hedge out general market fluctuations. OwenX 16:14, 26 Mar 2005 (UTC)

[edit] Accuracy disputes--any left?

Things seem to have settled down around here. Are there any open issues we have to settle? If there are no objections, I'll remove the Category:Accuracy_disputes tag. Owen× ☎ 18:46, 28 August 2005 (UTC)

Actually the article contained several inaccuracies that I removed. It stated that the uptick rule does not apply to Nasdaq securities, but that was not true. This article is quite a mess so you might want to reinstate the tag.--Lastexit 19:03, 22 April 2006 (UTC)

Nasdaq securities have an "up-bid" rule, not an uptick rule. Additionally, "Pilot" securities on the NYSE are subject to no tick rule whatsoever.--Son of Scholes 14:40, 6 August 2006 (UTC)

[edit] When was legislation introduced to ban short selling of IPOs for 1 Month?

Are there legislative initiatives to repeal this ban?

[edit] Question

Why would the seller buy the stocks and lose $500 instead of simply keeping the $1000? Am I missing something?

He is not losing. All the operations are based on the assumption that a certain share would fall in price within a period of time, let's say within a week. Imagine that, according to your analysis, or to the market rumors, you feel that a google share price would fall because of a reason. Let's see:
  • You borrow a stock of Google from the brokerage firm for a week.
  • You sell it in the market for a 100 the first day (though you never owned it)
  • Anytime within the week, you can buy it back. The fact is that you'll wait for the price to fall down so you can pay 80, let's say, for the same share you had sold for a 100. You make a profit of 20.
  • You return the share back to their original owner. You pay the firm a fee and you get away with a profit. -- Svest 00:37, 5 December 2005 (UTC)  Wiki me up™

Can someone explain the dividend payment on short sale better? Investor S borrows 100 shares of XYZ from Investor O, company XYZ pays a dividend of $50 while the short position is open. Investor S has to pay $50 to investor O, but who gets the $50 that the company paid out?

Whoever bought the shares from Investor S. Remember, the only reason S borrows the shares is to immediately sell them to Investor B. As far as Company XYZ is concerned, B is the only one entitled to the dividend. Owen× ☎ 14:56, 10 June 2007 (UTC)

[edit] Cleanup

I tried to make the example in the first paragraph clearer. It could probably still use some work. Msridhar

This article is poorly written, disorganized, and, I believe, heavily skewed against short-selling. I have attempted to restore balance but I believe that far more work is needed.--Lastexit 18:59, 22 April 2006 (UTC)

I have started to make some changes to the article. I am a short seller, so I can help to bring it back towards NPOV from its current skew against shorting. Goodemi 15:46, 4 August 2006 (UTC)

Is there a reason why many sections of this article is written in the second person? It reads more like a guide from a broker's FAQ than an actual encyclopedia.24.195.250.143 22:13, 8 November 2006 (UTC)

[edit] Merge from Short (finance)

Please see discussion on merger: Talk:Short (finance) ---Tvh2k 14:15, 24 October 2006 (UTC)

I would be against the merge. Though short selling is based on keeping a short position on the stock, you can shouw a short position simply through derrivatives, not just short selling. --Srwm4 08:06, 4 December 2006 (UTC)

[edit] Currency

Am I wrong or the example made with the currency edging is incorrect?

[edit] Borrowing

Why on Earth would anybody lend someone some shares in the first place for something other than shortselling? —The preceding unsigned comment was added by Energman (talk • contribs) 14:14, 7 December 2006 (UTC).

Are you suggesting that to lend for the purpose of someone's short sale is somehow not OK? That's kind of what it sounds like, but I can't tell. Or, are you actually asking this question because you want to know if there is another reason to _borrow_ a stock?
I don't know of another way that someone would use a borrowed stock, but the answer to the part about "why would someone lend it" is that A) Why not? There's extremely little risk. They'll almost certainly get back their shares, which they intended to hold anyway, even through a temporary price decline. And, B) Why so? They charge fees for this service, so they make money. The fact that someone else might make even more money on the borrowed stock is not a reason for the lender to not lend it.
Cash works this way too. Why would anyone lend cash for some reason other than enabling the borrower to make money? Borrowers turn cash into capital which will yield a greater return than what they must pay to the lender in interest. That's why people borrow cash. It doesn't stop the lender from making _their_ profit, and lenders themselves aren't in the business of turning cash into whatever of 10,000 forms of capital their borrowers are getting rich from, which is why the lenders don't themselves make those potentially greater-returning capital investments. Of course you understand, I'm not talking about consumer loans here - consumers won't profit from their car, creditcard, home-equity etc. loans. 198.49.180.40 16:37, 15 August 2007 (UTC)

[edit] Short and distort

I recently became aware of this article, and proposed it for deletion as a neologism and as a POV fork. A user objected. I have tried to wrestle with the more formal process but was unable to manage it. Would appreciate some technical assistance or, if you disagree, some additional evidence in support of this article.--Samiharris 15:27, 15 April 2007 (UTC)

[edit] Short (finance)

It just came to my attention that there is a duplicative article called Short (finance). It was agreed some months ago that that article would be merged into this one, with this one the surviving entity in the merger (so to speak). Can something be done to effectuate this badly needed M&A? Am surprised it hasn't been done already. Perhaps someone needs to approach Morgan Stanley for merger financing. ;)--Samiharris 17:58, 14 May 2007 (UTC)

[edit] Opening Paragraph

Why is an example of insider trading used to describe a futures/options short in the opening paragraph? This needlessly complicates the description and casts a bias against shorting. 144.226.230.36 13:55, 25 June 2007 (UTC)

I'll admit the writing isn't great, but I don't see the bias.--Samiharris 15:01, 29 September 2007 (UTC)

Sami, here's an example of what seems to be bias, though later in the story: "It was perceived as a magnifying effect in the violent downturn in the Dutch tulip market in the seventeenth century."

No actual contemporary "perception" of this "violent" magnification is cited as evidence. It just seems one of the touches designed to imply "short sellers have always been causing trouble, even in the days of wooden shoes!" --Christofurio (talk) 00:49, 24 March 2008 (UTC)

[edit] Check fact: "this law was lifted in 1947"

User 68.11.53.183 changed this sentence from 1947 to 1997, can someone please verify this? Otherwise, please revert vandalism. Thanks. Finnancier 13:35, 24 October 2007 (UTC)

[edit] Short interest versus short volume

Noticed there's a mistake in the article on "Sources of short interest data". I know for a fact that short interest data is NOT available in Hong Kong.

Short "volume" is. I understand this is the case for many countries and need to be checked.

There is a subtle but significant difference between short volume and short interest. —Preceding unsigned comment added by 203.210.79.192 (talk) 02:57, 31 March 2008 (UTC)

[edit] "This" referent & dramatic results

In the first paragraph of "Concept" we have this confusing passage:

"The lender of the shares does not lose the right to sell the shares. While the shares are lent, two investors have a right to sell the same shares. This has happened in 2007 in the UK with dramatic results, when shares in a Bank, Northern Rock, were £12 in February 2007 and £2 in September. Short sellers made over £1 billion in about seven months.[2]"

It's not clear what "this" refers to. Is there any evidence that the Northern Rock collapse was caused by two investors selling the same shares (as this passage implies)? The citation does not clarify; it sounds like an ordinary case of a collapsing stock that was heavily shorted. Also, is it true that two investors have a right to sell the same shares? If so, this fact bears more explanation, perhaps in a different section, and not in this overview. Ezrakilty (talk) 12:00, 12 April 2008 (UTC)

It looks like nonsense to me - firstly because the broker who lent originally does not sell the shares that he lent - if anything he sells the shares that he will receive back, but more accurately he sells the right to receive the shares back. Secondly, "more people selling" doesn't cause prices to fall, because there are the same number of purchases as sales, clearly, so increasing the volume of share sales also increases the volume of purchases. Thirdly, the assumed link is dubious anyway and totally unsupported. Art Markham (talk) 15:51, 18 May 2008 (UTC)

The first sentence is correct. In most instances, the "lender" does not even know that he has loaned the shares. He loses no rights, including the right to sell. The second sentence is incorrect. Having sold the borrowed shares, the short seller has no further right to sell. That is confusing. So is the example.--Bassettcat (talk) 18:05, 18 May 2008 (UTC)

But when the short seller borrows the shares, he must be given the right to sell them in order to allow him to sell them once, which is the whole purpose. It is the lender that can't give someone else the 'actual' shares while they are lent (though he can do something similar by selling his rights over the shares, i.e. the right to receive them back and usually the right to any dividend, which is economically equivalent). It's no different to a bank lending $1000 - it has the right to receive it back, and can sell someone else the loan (i.e. that right to receive it back), but it can't actually put that same $1000 into someone else's bank account until it receives it back from the borrower. The borrower doesn't need to keep the $1000 in the meantime, as it is his for the duration. Art Markham (talk) 14:15, 8 June 2008 (UTC)

[edit] Shorting wheat

We currently have this example of a short: "a farmer who has just planted his wheat wants to lock in the price at which he can sell after the harvest. He would take a short position in wheat futures." Is this right? Locking in a price in this way is just an ordinary future, not necessarily long or short in any way. True, the farmer is shielded against price falls, but he doesn't profit any more if the price falls than if it rises - the point is that he now has no interest in whether the price rises or falls. Art Markham (talk) 16:09, 18 May 2008 (UTC)

He's selling now wheat that he doesn't yet have. That's short, whether the transaction is conducted in futures or not. 76.200.153.78 (talk) 20:56, 7 June 2008 (UTC)
Sure, but my understanding of being "short" is that you stand to profit from a fall in price. Additionally, the intro says that "Similarly, a short position in a futures contract, or to be short a futures contract, means the holder of the position has an obligation to buy the underlying asset at a later date, to close out the position." In this case the farmer isn't buying or selling the asset to close the position - he's making it. Price moves are therefore irrelevant to him once he has signed the contract. Art Markham (talk) 14:03, 8 June 2008 (UTC)