What is Short Selling?

What is short-selling?

Short-selling, in the context of the stock market, is the practice where an investor sells shares that he does not own at the time of selling them. He sells them in the hope that the price of those shares will decline, and he will profit by buying back those shares at a lower price. In India, there is no prohibition on short-selling by retail investors. Institutional investors —domestic mutual funds and foreign institutional investors registered with the Securities and Exchange Board of India (Sebi), banks and insurance companies — are prohibited from short-selling and are mandatorily required to settle on the basis of deliveries of securities owned and held by them.

How is short-selling beneficial?

Short-selling is considered an essential feature of the securities market not just for providing liquidity, but also for helping price corrections in over valued stocks. Supporters of short-selling claim its absence distort efficient price discovery, gives promoters the unfettered freedom to manipulate prices and favours manipulators than rational investors. Securities market regulators in most countries, and in particular, all developed securities markets, recognise short-selling as a legitimate investment activity. The International Organisation of Securities Commissions (IOSCO) has also reviewed short-selling and securities lending practices across markets and has recommended transparency of short-selling, rather than prohibit it.

Are there any drawbacks of short-selling?

Critics of short-selling feel selling, directly or indirectly, poses potential risks and can easily destabilise the market. They believe that short-selling can exacerbate declining trend in share prices, increase share price volatility, and force the price of individual stocks down to levels that might not otherwise be reached. They also argue that declining trend in the share prices of a company can even impact its fund raising capability and undermine the commercial confidence of the company. In a bear market in particular, short-selling can contribute to disorderly trading, give rise to heightened short-term price volatility and could be used in manipulative trading strategies.

Will institutional investors in India be allowed to short-sell securities?

Sebi is working on a proposal to introduce a stock borrowing and lending mechanism. This will allow institutional investors to short-sell by borrowing shares. Under this arrangement, an investor A, who feels that a certain stock is overpriced, borrows those shares for a charge from investor B, who is willing to lend those shares. Investor A then sells those shares in the market, hoping that the price declines so that he can buy cheap and return them to investor B.

What is the difference between covered short sales and naked short sales?

Covered short sales are those in which the seller arranges for the delivery of shares he has sold by borrowing them. Naked short sales are those in which the seller does not intend to provide for the delivery of shares he has sold. Most international securities market regulators have prohibited naked short-selling and require the client to have documentary evidence of borrowing/tie-up with lenders before executing the sale transaction. This is because naked short sales in huge quantities can destabilise the market.

How does the stock lending and borrowing mechanism function in other markets?

World over, securities lending and borrowing transactions are, by and large, over-the-counter (OTC) contractual obligations executed between lenders and borrowers. International securities market regulators do not directly regulate the lending and borrowing transactions. In many international markets, entities like custodians and depositories run the lending and borrowing scheme and have their own screens for meeting the demand and supply of securities from their clients.

Source: Economic Times

Bottomfish in this market?

Should you be lapping up good stocks at the current levels? Markets have corrected by almost 8% in the last 4 trading sessions. Most of the good stocks have been down between 10-20%. Should you then buy in the current market? Indiabulls Securities’ CEO Divyesh Shah says, “If you are holding a good stock in your portfolio, keep it. It is not advisable to bottomfish in these markets. From what we see now, volatility is so high, it wouldn’t take even five minutes to wipe out a sizeable portfolio. Maintain status quo would be my advice to clients,” Mr Shah added. I agree with this sentiment completely. Unless the FM gives some clarity on the P-Notes issue the uncertainty might continue with FII selling off majorly. But there is a strong argument against this as well. Since the fundamentals are still the same this is only a short term blip and investors can use this opportunity to pick up stocks from a long term perspective.

Stocks plunge on economic fears

DOW has its biggest sell off of the year.

Udayan Mukherjee's Analysis of the P-Notes Issue

"The stock market reaction to the P-note draft is unambiguous. The Finance Minister may wish it away by ascribing it to rumours but all of us know the real reason for this selloff. Every investor fears that our market could be robbed of the big dollar trigger if this draft were to become law. The fears are not unfounded. While the regulator and the Finance Minister have been glibly proclaiming that P-notes have not been banned, the product has essentially been killed. Sure, small shuffles and marginal flows can happen but the P-note is history, if this draft were to come through.

The genesis of this whole move is the rupee. On that score the Finance ministry should have all our sympathy. The rupee is a problem for the country. At this rate it will kill many industries, render lakhs jobless and may have deep economic ramifications. No Finance minister can want that. Yet, this is an inevitable fallout of a rapidly growing economy. The solution cannot lie in controlling flows of global capital into the stock market. It starves the engine of growth and sends out the most regressive signal to the world. Even if it is done, as in this case, under the guise of seeking more transparency.

If it had to be done, the more elegant way of doing it would have been to decide a sunset period and allow P-note investors to register themselves during this period and transition. Instead, they are seeking to bring the product to a dead halt before forcing global funds to register. This is perhaps reflective of the desperation to cut flows now and stem the rupee's rise. The ministry is aware that India is very hot now and if the window is left open for another six months, the seasonally strong October to February period, the market could be inundated with flows. The dollar rupee could go for a toss, with it, exporters. So, the more reasonable expectation is that the draft becomes law, BUT with important modifications. Maybe the 40% of AUC clause is revisited, hedges allowed for P-note investors in stocks, relaxations made for IPO applications through P-notes etc. The sting needs to be taken out but even so the world of P-notes and hedge funds will perhaps never be the same again.

The trillion-dollar question is how the stock market digests this and moves on. Of course, that depends a lot on the final contours of the draft. If it is implemented in its current form we may have a difficult six-month period for the market. No new flows will come in through a window which accounted for over half of all FII flows and the constant threat of eventual and gradual unwinding will hang like a Damocles’ sword over the markets' head. Not conducive conditions for outperformance. This is a medium-term technical handicap which the market will get over but it may take a while. Technical constraints may restrain bull markets but don't generally alter their course altogether. We are still in a very strong bull market; make no mistake about that. The emerging market dream run has just begun; it is nowhere near peaking out. In such an environment, new highs will come again for our market. If this P-note business works out to a reasonable conclusion, then we will probably have it soon, if not we will have to wait till the technicals improve. This is not to undermine the importance of the current draft; it may deal us a structural technical blow for a few months, something which may even spark off a deeper correction and relative underperformance. Let’s hope the regulators will not push us beyond a point. Sense should prevail."

Source: Moneycontrol

Stock Markets Today

Almost 1000 points down in a day!! As per a report investors have lost over Rs 2.7 trillion in the last 2 days!!! Almost all the major stocks have corrected in the range of 10-18% from their day's highs. This has mostly been on account of funds selling off on account of uncertainly on political front. Now we can only wait and watch and see what happens tomorrow. Let's hope for the best!

Stock Tip: Neyveli Lignite

This stock looks like a good long term bet. Ashwani Gujral has given a target of Rs 150 for this stock in the short term. Analyst Sudarshan Sukhani is also of the view that this stock should be accumulated on dips and should be kept for long term.

CMP: Rs 133

Stock Markets today

Markets are up today on account of heavy buying seen in sectors like Telecom, Capital goods, oil and gas, reality stocks etc. The markets have not only recovered yesterday’s losses but touched new highs today.