Monday, 13 February 2023 03:32

What is short-selling?

Rate this item
(0 votes)

For nearly as long as the stockmarket has been around, people have been betting against it

It is not quite the oldest trick in equity trading, but it is not far off. In 1602 the Dutch East India Company became the first to sell its shares to the general public. By 1608 Isaac le Maire, a disgruntled former director, had clubbed together a syndicate that sold stock it did not yet own for future delivery, then spread rumours about the company to drive the price down. By the time the shares came due for settlement, the syndicate could buy them from the market for less than they had originally sold them, booking a profit. The Dutch East India Company, catching wind of this, cried foul. These were “vile practices”, they said, “disadvantageous to the investors and particularly the many widows and orphans” who had shares in their firm. What is short-selling—and is it a bane or a boon?

These days, short-sellers—who bet on asset prices going down rather than up—have had their sharper practices blunted. Le Maire’s rumour-mongering, for instance, would count as illegal market manipulation, and regulations introduced after the financial crisis of 2007-09 would force him at least to borrow the stocks before selling them. Instead, short-sellers seek out companies whose shares they believe to be overvalued, whether by market exuberance or outright fraud. Successful ones describe their job as being much like investigative journalism: months or years of trawling through documents and talking to sources to uncover misbehaviour others have missed.

After they have placed their bets some publish “short reports”, setting out their evidence in the hope that other investors will sell and trigger a fall in the target’s share price. A case in point is Hindenburg Research, which on January 24th 2023 accused the Adani Group, a giant Indian conglomerate run by one of the world’s richest tycoons, of stock manipulation and fraud. (The Adani Group denied the allegations, issuing a 413-page rebuttal that called Hindenburg’s report “all lies”.) Within days the group’s companies had seen more than $100bn wiped off their value, and one of them had been forced to cancel a share sale, returning $2.5bn to investors.

It is hard to argue that those who spend their days trying to uncover corporate malfeasance are wrong to do so. Indeed, The Economist believes that short-sellers are good for markets. Short-sellers are associated with efforts to uncover some of the business world’s biggest frauds. Wrongdoing by Enron, a Texan energy giant that imploded in 2001, was one; malfeasance at Wirecard, a German fintech firm that collapsed in 2020, was another. But the shorts themselves tend, like le Maire, to be unpopular. Andrew Left, an outspoken short-seller, announced in 2021 that he would no longer publish short reports after 20 years of doing so. Retail traders, he said, had shared his personal information on social-media platforms and sent threatening messages to his children. When you publish flattering research on companies, says one hedge-fund manager, “generally people like you, because generally people are long. Everyone hates you when you’re short.”

Short-selling is also a notoriously difficult business in which to turn a profit. Returns are capped, as a stock’s price cannot fall below zero. Yet it can rise indefinitely, making the potential losses unlimited. Meanwhile, short-selling funds tend to oversee much less money than traditional “long-only” ones, limiting the scope for chunky management fees. Speak to practitioners, though, and you get the sense that easier ways to make money do not tempt them. They are in it for the thrill of the chase.

 

The Economist

December 23, 2024

Investors on NGX gain over N1trn in 5 days

The Nigerian Exchange Limited (NGX) posted strong gains last week, with investors adding more than…
December 20, 2024

Atiku questions alleged hack of NBS website, says timing suspicious

Former Vice President Atiku Abubakar has raised concerns over the recent claim that the website…
December 22, 2024

How to know if your memory lapses are serious or not

The older I get, the more panicked I become when something slips my mind. Is…
December 21, 2024

‘Professional Back-Scratchers’ charge up to $130 per hour

The Scratcher Girls is an unconventional relaxation therapy studio that charges clients up to $130…
December 21, 2024

NAFDAC busts illegal rice repackaging operations in Nasarawa, Abuja

The National Agency for Food and Drug Administration and Control (NAFDAC) has cracked down on…
December 23, 2024

Here’s the latest as Israel-Hamas war enters Day 444

Israel's Netanyahu eyes Iran after triumphs over Hamas, Hezbollah, Syria 2025 will be a year…
December 20, 2024

OpenAI launches voice and text access to ChatGPT through new phone service

OpenAI has introduced a novel way to interact with its popular ChatGPT artificial intelligence system…
December 17, 2024

Ademola Lookman named 2024 CAF Men’s Player of the year. These players won in other…

Ademola Lookman, the Super Eagles winger, was crowned the 2024 CAF Men’s Player of the…

NEWSSCROLL TEAM: 'Sina Kawonise: Publisher/Editor-in-Chief; Prof Wale Are Olaitan: Editorial Consultant; Femi Kawonise: Head, Production & Administration; Afolabi Ajibola: IT Manager;
Contact Us: [email protected] Tel/WhatsApp: +234 811 395 4049

Copyright © 2015 - 2024 NewsScroll. All rights reserved.