What does this necklace have to do with short selling
? Imagine that this is the hottest new thing that
everyone is wearing. Your friend has one and your
neighbor wants one at the moment. It's selling in
shops for£20. But you think that this is
a fad and that the price will go down.
So you borrow your friend's necklace and you sell it
to your neighbor who gives you£20 for it.
One month later, everyone's wearing a new piece of
jewelry and this necklace is now selling for£15 in
shops. So you buy the necklace and you give
it back to your friend. In the meantime,
you've made£5. This is the same concept that short
sellers use borrowing shares and selling them at a high
price. With the aim of buying the same amount
of shares at a lower price and returning them to
the lender. It's not a new thing, but
short selling is back in the spotlight. Hindenberg research
recently targeted a company linked to one of Asia's richest
men as well as another company linked to one of
the founders of Twitter. Most shorting is done by
hedge funds and institutional investors. There's also a category
known as activist shots. They research companies to find
targets that they allege have shady business or accounting practices
. They spread their views sometimes anonymously and often on
social media. The goal is to drive the stock
price down to what they think the company is worth
. Short selling can cause a lot of controversy.
Critics say that short sellers are distorting the market and
their practices can blur into market manipulation. The short
sellers say they're keeping markets and companies honest. One
thing to keep in mind is that the trade only
works if the stock price goes down. If the
shares go up short sales could get squeezed and lose
money instead.