Short Selling: What Is Short Selling?
The Basics
When an investor goes long on an investment, it means she has bought a stock believing its price will rise in the future. Conversely, when an investor goes short, he is anticipating a Finanical Glossary Refinancing decrease in share price.
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.
Still with us? Here's the skinny: 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 Hope For Homeowners Act Of 2008 Ticker symbol higher price, and you lose money.
Most of the time, you can hold a short for as long as you want. However, you can be forced to cover if the lender wants back the stock you borrowed. Brokerages can't sell what they don't have, and so yours will either have to come up with new shares to borrow, or you'll have to cover. This is known as being called away. It doesn't happen often, but is possible if many investors are selling a particular security short.
Since you don't own the stock (you borrowed and then sold it), you must pay the lender of the stock any dividends or rights declared during the course of the loan. If the stock splits during the course of your short, you'll owe twice the number of shares at half the price.
Also, because you are being loaned the stock, you are buying on margin. In fact, you have to open a margin account to short stocks.
Why Short?
There are two main motivations to short:
1. To speculate
The most obvious reason to short is to profit from an overpriced stock or market. Probably the most famous example of this was when George Soros "broke the Bank of England" in 1992. He risked $10 billion that the British pound would fall and he was right. The following night, Soros made $1 billion from the trade. His profit eventually reached almost $2 billion.
2. To hedge
For reasons we'll discuss later, very few sophisticated money managers short as an active investing strategy (unlike Soros). The majority of investors use shorts to hedge. This means they are protecting other long positions with offsetting short positions.
Restrictions
There are many restrictions on the size, price and types of stocks you are able to short sell. For example, many brokers impose large margin requirements on clients who short stocks with a market price that is less than $5.
In July of 2007, the Securities and Exchange Commission eliminated the uptick or zero plus tick rule. This rule required that every short sale transaction be entered at a higher price than that of the previous trade and kept short sellers from adding to the downward momentum of an asset when it was already experiencing sharp declines.
hedge fund
A hedge fund is a private investment fund, having a largely unregulated pool of capital, whose managers can buy or sell any assets, make speculative trades on falling as well as rising assets, and participate substantially in profits from money invested. It charges both a performance fee and a management fee. Typically open only to very wealthy qualified investors, hedge fund activity in the public securities markets has grown substantially, accounting for approximately 10% of all U.S. fixed-income security transactions, 35% of U.S. activity in derivatives with investment-grade ratings, 55% of the trading volume for emerging-market bonds, and 30% of equity trades.[citation needed] Hedge funds dominate certain specialty markets such as trading within derivatives with high-yield ratings and distressed debt.
In the United States, an investment fund must be restricted to a limited number of accredited investors in order to be exempt from direct regulation. While there is no legal definition for "hedge fund" under U.S. securities laws and regulations, they typically include any investment fund that, because of an exemption from certain regulations that otherwise apply to mutual funds, brokerage firms or investment advisors, can invest in more complex and risky investments than a public fund might. Because they are not open to the public, they do not have to make public disclosures of their investments or investors. Hedge funds managed from other countries have similar relationships with their national regulators. Since a hedge fund's investment activities are limited only by the contracts governing the particular fund, it can make greater use of complex investment strategies such as short selling, entering into futures, swaps and other derivative contracts and leverage.
As the name implies, hedge funds often seek to offset potential losses in the principal markets they invest in by hedging their investments using a variety of methods, most notably short selling. However, the term "hedge fund" has come in modern parlance to be applied to many funds that do not actually hedge their investments, and in particular to funds using short selling and other "hedging" methods to increase rather than reduce risk, with the expectation of increasing return.
Hedge funds have acquired a reputation for secrecy due to the protection of proprietary investment strategies. While many believe that hedge funds are outside the regulatory regime that is applied to retail funds, there still remains significant disclosure that is required to be made when specific triggers are met, but in general informational disclosure is less burdensome than that of registered funds. Additionally, divulging trading methods and positions would compromise the business interests of many types of hedge fund, tending to limit the information they want to release.
The assets under management of a hedge fund can run into many billions of dollars, and this will usually be multiplied by leverage. Their sway over markets, whether they succeed or fail, is therefore potentially substantial and there is a continuing debate over whether they should be more thoroughly regulated.
Ticker symbol
A stock symbol or ticker symbol is a mnemonic used to uniquely identify publicly-traded shares of a corporation on a particular stock market. A stock symbol may consist of letters, numbers or a combination of both. The word "ticker" used to mean "ticker symbol" is specific to U.S. stock symbols.
Beginners Education In Forex Trading And Forex Glossary
Our beginners education in forex trading page is simply to offer glossary of the main terms used in forex currency trading and to offer pointers to the best forex tradingeducation available. Education in forex trading is necessary if you intend to generate seious income. Forex trading involves risk but educated professionals minimize losses as much as possible while increasing profitability.
Here is our forex glossary in simple layman's terms:
Aggressive - This is when an investment strategy has an above-average risk tolerance. Usually the expectation is that it will yield high returns. Usually aggressive investments are better when buying on a margin or when large stocks of fast growing companies are purchased
Balance - The sum on the account of a client after the last transaction has been conducted.
Buy and Hold - This is when stocks are purchased for a long period of time say 10 to 20 years, with the belief that stock prices will go up in the long-term. Short-term fluctuatuions attributed to inflation and business cycles are usually ignored. With this investment strategy, trade commisions tend to be lower and so are taxes.
Buy at Open - This is when you place a market order before the opening of the trading day (at 9.30 Eastern). With this, your trad will be t whatever the price is that morning.
Capital gain - This is the profit realized from the sale of an asset or investment. Simply put it is the amount the investment sold for minus how much it was bought for. Unrealized capital gain is when an investment that has not been sold yet but will result in a profit if sold. There are tax benefits associated with capital gains, in contrast to ordinary gains.
Capital loss - This is loss incurred on the sale of a capital asset or investment. Ordinary income can be offset by capital losses up to a maximum of $3000. The rest, can be carried forward indefinitely.
Close a Position - Ending an investment by selling
Conservative - Conservtive investors tend to take minimum risk with investment. Protecting their capital is of paramount importance.
Day Trader - This is a stock trader who undertakes a large number of trades each day. They generally buy and sell very quickly, closing all positions by the end of each trading day.
Diversification - A diversified portforlio contains a variety of investments such as real estate, bonds and stock. The idea is to minimize risk by making this combination as they are all unlikely to move in the same direction at the same time. Although this means a more consistent performance overtime, it reduces the downside as well as the upside potential of the investment
Equity - This is similar to "net value". This is expressed the total value of asset minus total liabilities. For a brokerage accounts, equity is the net value of securities in the account after all margin requirements are considered. For future trading accounts, it is the value of all the securities at current market price.
Floating Profit - The current profit of open positions
Floating storage - Fee charged for postponement of an opened position over midnight GMT.
Fundamental Analysis - This is a method of analysis used by investors to evalute a company's finances and operations. All assets, sales, debt, products and current competition are thorougly examined. This is in contrast to technical analysis which takes the whole market into consideration.
Growth Strategy - This is when investment is made into companies that are growing faster th with the purpose of generating capital gains rather than dividends
Hedge funds - These types of funds are allowed to use very aggresive trading strategies that are not available to mutual funds. Some of the strategies used include program trading, selling short, arbitrage, leverage, swaps, and derivatives. Hedge funds are high risk and are restricted by law to no more than 100 investors per fund. Consequently, the initial investment amount required tends to be high - generally from $300,000 to $1 million.
Individual Retirement Account (IRA) - This is a tax-deferred retirement account to which an individual can make contributions of up $2000/year.
Leverage - The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.
Limit Order - This is the maximum price an investor is willing to pay for a stock. It prevents you from entering a position at an extreme price. It can also be combined with "buy" or "sell on stop" orders.
Long Position - This is when stocks are purchased with the hope of a rise in price. Opposite of a short sale.
Margin - The amount of equity contributed by a customer as a percentage of the current market value of the securities held in a margin account.
Margin Account - A fairly complex account that allows a customer to buy securities using money borrowed from the brokerage firm. Brokerage firms offer low-interest loans to encourage their customers to buy on margin. There are tight rules regulating this practice. The Federal Reserve only allows up to 50% of total amount invested.
Margin Requirement - A required sum to be deposited, calculated according to the formula 100,000 / X + 100,000 / K, where X = leverage, and the number of items equals the number of open positions.
Open A Position - Same as opening an investment. A short position requires selling and a long position requires buying.
Overbought/Oversold Indicator - This used to define when prices move far and fast in either direction. This indicator is calculated based on a moving average of the difference between the number of advancing and declining issues over a certain period of time. The analyst will sell if the market is considered overbought, and vice versa.
Percentage - This is Equity / Margin Requirement. When Percentage is lower than 50 % it will not be possible to open new positions.
Pip - The smallest price change that a given exchange rate can make.
Risk Management - The process of analyzing risk exposure and how it can be handled.
Risk Tolerance - Ability to handle declines in a portfolio.
Short - This is when a stock is sold short without having covered it.
Short Selling - Borrowing a security or commodity futures contract from a broker and selling it, with the understanding that it must later be bought back and returned to the broker. Short selling is a technique used by investors who try to profit from the falling price of a stock. The investor's broker will borrow the shares from someone who owns them with the promise that the investor will return them later. The investor immediately sells the borrowed shares at the current market price. If the price of the shares drops, he/she "covers the short position" by buying back the shares, and his/her broker returns them to the lender. The profit is the difference between the price at which the stock was sold and the cost to buy it back, minus commissions and expenses for borrowing the stock. But if the price of the shares increases, the potential losses are unlimited.
Spread - The difference between the current bid and the current ask (in over-the-counter trading) or offered (in exchange trading) of a given security .
S&P 500 - This is the most commonly used benchnmark for the US stock market. Unlike the Dow Jones Industrial Average (DJIA), which contains only 30 companies, the S&P 500 has 500 companies which are carefully chosen by the S&P Index Committee using information such as the liquidity of the company, the market size and sector. The S&P 500 is a market-value weighted index, meaning each stock's weight in the index is proportionate to its market value. To most experts it is really the definition of the US market.
Technical Analysis - A method of evaluating securities by relying on the assumption that market data, such as charts of price, volume, and open interest, can help predict future market trends. Technical analysts believe that they can accurately predict the future price of a stock by looking at its historical prices and other trading variables. Technical analysis assumes that market psychology influences trading in a way that enables predicting when a stock will rise or fall. For that reason, many technical analysts are also market timers, who believe that technical analysis can be applied just as easily to the market as a whole as to an individual stock. Unlike fundamental analysis, the intrinsic value of the security is not considered
Ticker Symbol - A system of letters used to uniquely identify a stock or mutual fund. Symbols with up to three letters are used for stocks which are listed and trade on an exchange. Symbols with four letters are used for NASDAQ stocks. Symbols with five letters are used for NASDAQ stocks other than single issues of common stock. Symbols with five letters ending in X are used for mutual funds.
Volatility - The relative rate at which a stock price moves up or down. High volatility is when the price of a security moves rapidly up and down over a short period of time. The opposite is said to be low volatility.
Volume - The total number of shares, bonds or contracts traded during a given period, for a security or an entire exhange market