Hello
Can someone give me some examples of how this has worked for them?
Cheers
Buy shares, hold shares, get interest, sell shares
Basically it looks no difference to. You buy and sell as you want. However, while you hold the investment you can get interest on the shares being lent out. You do nothing, the portfolio and holding look identical, you sell when you want… Simply you get interest
Behind the scenes your shares are being lent to cover shorts so some people may not want to do this simply because they don’t want to facilitate shorting
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Surely if the shares are being lent if shorted then the price will go down?
Hi. I am slightly struggling to understand what you are asking. I want to help and happy to explain but just not entirely sure what you want to know.
There is a huge debate about shorting that goes back decades. There are people who are ardently for and against shorting. However, there is a widespread view that it is basically part of the market and helps to ensure the share price better reflects the value of the company. There are very very clear examples of where that isn’t true. However, the argument is that if a company is worth $100/share and shorters try to short the company to below $80 (for example) then buyers knowing the true value will step in and buy pushing the price back to $100 and the shorters will lose. The problem comes 1) when shorters have greater power than the normal traders and 2) when the market is manipulated. However, the simple fact remains that buyers are free to buy if they believe that the price is low.
It you think the price is unreasonably low then basically it provides a buying opportunity.
The main problem comes with stock that isn’t very liquid and in those situations traders can push the price in either direction with little or modest volume.
Shorting can be very high risk. Some of the massive price rises and spikes are caused by too many people taking shorts in a company so there is a large short interest and strength in the buying can then cause a short squeeze where shorters can’t buy shares to cover their shorts and are desperately trying to close out and the affect of large numbers of shorts closing (resulting in buy orders to close the shorts) causes a massive rise in the share price.
One of the most famous short squeezes was with Porsche where (I think from memory) Porsche were buying VW shares over a long period of time (a couple of years). Porsche said that they didn’t intend buying more (they owned about 30% of VW) and hedge funds thought that VW was overvalued so started increasing their short positions. However, Porsche kept buying and when they announced that they had dramatically increased their stake in VW the hedge funds couldn’t close their short positions and VW temporarily became the most valuable company in the world because of the short squeeze. I don’t know if its true but I think I read that at one point the short position exceeded the total number of free shares in VW (ie total issued shares minus Porsche’s holding) so it was impossible for the shorts to close in an orderly way.
At the end of the day, shorting is a reality and that is unlikely to change. Whether or not you lend out shares for shorting isn’t going to change that or make any real difference.
You can look up the short interest in a company so you can see the amount of shorts. Also T212 tells you what the demand for lending is giving a further indication of short interest. You need to also consider that if a company has 10% short interest it means that someone has to buy 10% of the company at some stage. Thus while the short selling may have depressed the price it may also increase the price as shorts close (especially if they have to close quickly).
In T212 if you buy shares in an invest account the lending makes no difference you buy when you want at the prevailing price, they are shown in your portfolio and you sell when you want at the price at the time. It’s just that you also get some lending interest along the way
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If you only have excitable bulls in the market there is greater risk of trendy stocks getting overvalued and then crashing. Everyone can think of a few companies that they think are overvalued and some that are undervalued. That’s how markets work. However, if you have shorters and a trendy stock is getting ramped up then shorters can help the market buy cooling things off or acting as a counter force. The shares may still get overpriced but not by as much and thus if there is a correction it may not be as dramatic (although shorter may then pile in forcing it into a very undervalued position and creating a lot of volatility).
I am not arguing for shorting. I never short. I absolutely hate it when large shorters (instituations/hedge funds) seriously damage small cap companies’ share price. However, shorting also does have benefits for the market and I always have a smile when I see a short squeeze.
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