Q:What short selling instruments are available?A: Shorts include all kinds of derivatives some of which include buying a put, selling a call, or using CFDs or spread betting to go short via a proprietary contract. Note the latter may not, and very probably will not, include trading the underlying (one is only betting against an internet platform). All it means is that if the underlying security’s price falls, regardless of the tool or strategy, you come out ahead.
Q:How popular is short selling in practice?A: Short selling is not very popular among individual investors for two reasons 1.) it is risky 2.) it so so unnatural for a personal investor to go short. In fact, less than 2% of New York Stock Exchange trades are short sales, and the figure is even lower on the Nasdaq stock market.
Who are the short-sellers?
- In the first instance there are the active traders who buy and sell shares more frequently.
- Most of the short-sells are executed by hedge funds or a handful of high-risk unit trusts (mutual funds) that specialise in short positions.
- There are also the portfolio managers and private investors who need to hedge their trading portfolios in the short term with CFDs and other derivatives.
IG Group when noting the introduction of by the UK FCA of the rules in relation to the shorting of certain financial stocks has commented that in the first quarter of the financial year (being the period 1 June 2008 to 31 August 2008), less than £150,000 of IG’s total revenue of £53m resulted from clients shorting the 29 financial stocks which have been identified by the FCA. This low number reflects the long bias that clients have in single stock positions. Blimey! So during the best market opportunity in years to short banks, it seems the punters (using IG at least) missed out badly. Indeed, late last year, I recall IG Index saying about 95% of its client positions were betting prices would go up.