in Short selling,one trades a stock that they don't own in anticipation that the price will fall further,buy the stock cheaper and repay the broker. what happens when the stock price does not fall and rises instead? if you could not buy with your own money then I assume you don't have money to pay back at a higher price. Then what?

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Lets look at how short selling really works using Equity as an example.

I go to Njung'e and borrow 1m Equity shares from him. At the time Equity's shareprice is ksh200. I pay him a fee of ksh10 for each share.

Over the next two or three weeks I'll sell the shares say in bunches of 100,000 shares everyday or every other day. At the end of the period,I'll almost certainly succeed in driving the price down to a ksh100.

I then proceed to buy up the same 1m shares over say 5 days leaving the price at say ksh150.

In say a month,I'll have made around ksh40m.

But what about the real Equity shareholders?


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@Mainat...that's sounds a precise illustration of short selling. If that's what it is then it's ripe for NSE since the stock lender/borrower will have secured one another outside the market,may be with a plot. Deliberately driving stock prices up/down is the stock-in-trade at NSE (see today's market for evidence). I'd say its a good product...having once inadvertently benefited immensily from a Sameer price rally from 15 to 38 in a week...before it fizzled to 7 in the next week!!!




Hey...Somebody might make a killing out of me...?!

The rule put in place by the FSA was a wake-up call because of the HBOS saga. The short selling idea seems very good on paper,but I don't understand how it could make the market vibrant when it almost always benefits a few guys even in the so called developed market. Its easy to say I walk up to someone and borrow so much shares but who lends the shares and who borrows. Am sure the borrower is almost always a fund manager or a market veteran so to me its still an exclusive club.And if it was open to everyone,the only vibrancy felt would be a crush!! Spurring the market for individual gains should be stumped out everywhere!! They are saying that last year alone, £ 7billion was paid to traders as bonus' in London alone,no wonder they are taking so much risk with clients' money!

Money may not be able to buy you happiness,but it makes the unhappiness tolerable!

Actually,shortselling is the most interesting form of 'business' you can do.

what has been illustrated by Jammo and Mainat about how it works is correct. Just to add a point on Mainat's question on what happens to the real owners:

What really happens in the markets where this is allowed is that customers are allowed to buy shares on credit. hence you can go to AIB,buy 10,000 shares of equity but only pay for 5,000 shares. AIB then funds the other 5,000 shares but it remains in their name for security purposes but it is ideally yours. The AIB funded 5,000 shares is what the trader goes to borrow. this is because,you as the 'owner' of 10,000 equity shares,has only paid for 5,000 shares. so even if it got lost,you wont necessarily loose that much. but because you are paying an interest on this borrowed 5,000,the broker has to ensure that he keeps the shares for you. Mostly,these brokers know what kind of an investor you are. If you are like Jammo,they wont touch your equity shares because they know you will be coming for them any minute,if you are the long haul guys,they play the game with your 'borrowed' shares. Should you requier your shares and the broker has already lent them out,then he goes to another broker and borrows or allocates other shares from another customer but these shares have to be in the 'borrowed' category i.e,the customer had also not paid for them,in similar terms. sometimes they may make a loss,but mostly they do make profits and they are cautious the time frame they give. Mostly,its only the broker who can lend coz he is the one who holds the 'borrowed' shares.

I hope this makes alittle bit of sense.

Remember to read this together with Jammo's and Mainat's explanations.

Some deals are like glass. Sometimes it's better to leave them broken than try to hurt yourself putting it back together.