Ethics And The Role Of Short Selling

لتحميل الفيديو وتخطى الحجب اضغط على الكلام الازرق او الصور المتحركه

It's safe to say that short sellers aren't the most popular people on Wall Street. Many investors see short selling as "un-American" and "betting against the home team" because these sellers are perceived to seek out troubled companies.

Some critics even believe that short sales are a major cause of market downturns, such as the crash in 1987. There isn't a whole lot of evidence to support this, as other factors such as derivatives and program trading also played a massive role, but two years after the crash, the U.S. government held the 1989 House subcommittee hearing on short selling. Lawmakers wanted to look at the effects short sellers had on small companies and examined the need for regulation after allegations of widespread manipulation by short sellers of over-the-counter stocks. SEC officials reassured the public that manipulations hadn't been uncovered and more rules would be put in place. (To learn more, read Questioning The Virtue Of A Short Sale and The Uptick Rule: Does It Keep Bear Markets Ticking?)

But despite its critics, it's tough to deny that short selling makes an important contribution to the market by:

• Adding liquidity to share transactions. The additional buying and selling reduces the difference between the price at which shares can be bought and sold.
• Driving down overpriced securities by lowering the cost to execute a trade
• Increasing the overall efficiency of the markets by quickening price adjustments
• Acting as the first line of defense against financial fraud. For instance, in 2001, famed short seller James Chanos identified fraudulent accounting practices that occurred with the Enron Corporation, an energy-trading and utilities company. The company's activity became known as the Enron scandal when the company was found to have inflated its revenues. It filed Chapter 11 bankruptcy at the end of 2001. (To learn more about this scandal, see The Biggest Stock Scams Of All Time.)

While the conflicts of interest from investment banking keep some analysts from giving completely unbiased research, work from short sellers is often regarded as being some of the most detailed and highest quality research in the market. It's been said that short sellers actually prevent crashes because they provide a voice of reason during raging bull markets.

However, short selling also has a dark side, courtesy of a small number of traders who are not above using unethical tactics to make a profit. Sometimes referred to as the "short and distort," this technique takes place when traders manipulate stock prices in a bear market by taking short positions and then using a smear campaign to drive down the target stocks. This is the mirror version of the pump and dump, where crooks buy stock (take a long position) and issue false information that causes the target stock's price to increase. Short selling abuse like this has grown along with internet trading and the growing trend of small investors and online trading. (For more insight, read The Short And Distort: Stock Manipulation In A Bear Market.)

Short Selling Guide: Introduction

لتحميل الفيديو كامل اضغط على الكلام الازرق او الصور المتحركه 

Have you ever been absolutely sure that a stock was going to decline and wanted to profit from 

that? Have you ever wished you could see your portfolio increase in value during a bear market? Both scenarios are possible. Many investors make money on a decline in an individual stock or during a bear market, thanks to an investing technique called short selling. (For related reading, see When To Short A Stock.)

Short selling makes it possible to sell what one does not own, by borrowing the asset or instrument in question, selling it, and then buying it back (hopefully at a cheaper price) to replace the borrowed asset. As the seller does not own the asset, the process of selling it creates a short position (think of it as a shortfall) that must eventually be covered by buying it back on the market. The difference between the initial sale price and the price at which the asset was brought back represents the short seller's profit or loss.

Short selling is also known as "shorting," "selling short," or "going short." To be short a security or asset implies that one is bearish on it and expects the price to decline.

Short selling can be used for purposes of speculation or hedging. While speculators use short selling to capitalize on a potential decline in a specific security or the broad market, hedgers use the strategy to protect gains or mitigate losses in a security or portfolio. Hedge funds are among the most active short sellers, and often use short positions in select stocks or sectors to hedge their long positions in other stocks.

Short sellers are often portrayed as hardened individuals who are bent on profits and want the companies they target to fail. Additionally, many investors view short selling as an inordinately dangerous strategy, since the long-term trend of the equity market is generally upward and there is theoretically no upper limit to how high a stock can rise.

While shorting is inherently risky, the reality is that short sellers facilitate smooth functioning of the markets by providing liquidity, and also act as a reality check on overhyped stocks, especially during periods of irrational exuberance. Stocks may trade at sky-high levels or absurd valuations in the absence of short sellers’ restraining influence, and investors who buy into the hype could face massive losses in the inevitable correction.

Under the right circumstances, short selling can be a viable and profitable investment strategy for experienced traders and investors who have an adequate degree of risk tolerance and are familiar with the risks involved in shorting. Relatively inexperienced investors would also do well to learn about the basic aspects of short selling through learning tools like this tutorial in order to expand their investing toolkit.