Short selling is an amazing concept. You will be selling a stock or any kind of financial instrument that you have just borrowed so that you can make a sale. This is truly awesome, but you need to get more information about this right away. So read on.
Liquidity in the Stock Market
A short seller will provide liquidity to the financial markets restraining any influence about the exuberance of investors over time. They should not be seen as cynics trying to pry on other people`s mistakes but rather they should be treated as legitimate players in the investment world. Short selling is good for the market because it prevents any stock from getting too high down the road during peak time. Short selling is perilous in any surging market out there.
The short-selling process can be easily illustrated using a real-world example. To short any kind of stock, you will need to open a margin account at any brokerage firm out there. This will allow you to have fun in no time. You will need a certain amount of money to open this account so you can have some margin. Let`s say that you want to sell a hundred shares of a $10 stock. You will have to put in $500 as your account`s margin.
Common Short Sellers
Hedge funds are some of the most important investors in the world of short selling. If a hedge fund considers that a sector or stock is overvalued, they will use short selling so they can hedge this risk of the market. Sophisticated investors love short selling. They use short selling so they can speculate or hedge market risk over time. Speculators also play the short selling game from time to time, and they love it.
Short Selling Regulation
The uptick rule was imposed to the short selling world. This rule was created to avoid short seller from exacerbating any downward movement of a stock when the financial instrument was declining. In 2007, the SEC just ruled out this rule. Some experts in the short selling field believe that this action contributes somehow to the development of the market volatility and bear market of the years 2008 and 2009. In 2010, the SEC adopted what was called an alternative uptick rule.
Rewards and Risks
You can think of short selling as a kind of insurance for the world of financial markets. Let`s give you another example. Say you have a bought the S&P 500 index via a mutual fund. Say also that you have a short selling position for this index. If the market falls at a certain point in the future, you can make good money down the road. This is probably what will happen over time.
Remember that short selling is truly here to stay for the long run because it provides real liquidity to the market. This is truly important for the stock market because of the problems caused by downward trends in many stocks out there. There is some kind of regulation regarding short selling, but this will not prevent hedge funds and speculators from having fun and making profits via this amazing concept these days.