Candlestick Trading Blog
September 24, 2008
Temporary Short-selling Rules
| Temporary Short-selling Rules on the Stock Market The Securities and Exchange Commission (SEC) enacted temporary short selling rules in the American stock exchange, in an effort to guard the integrity of the securities market and bolster investor confidence. The temporary short selling rules will affect almost 800 stocks, and will be in place until October 2nd, unless the SEC decides to extend the ban. SEC chairman Christopher Cox said in a statement. "The emergency order temporarily banning short-selling of financial stocks will restore equilibrium to markets." The UK Financial Services Authority (FAS) also announced emergency action to place a similar ban in their markets until January. The FAS will assess the ban on a monthly basis. The OSC (regulator of the Toronto Stock Exchange), is stopping short-selling on certain securities within the Toronto and US exchanges. A similar ban was placed by The Australian Securities and Investments Commission (ASIC) but will exempt certain 'limited' market operations, and last approximately 30 days. Other regulatory authorities in Britain, France, Germany, Switzerland, Hong Kong, Russia, and Ireland are confining their ban to financial stocks only. Selling short has been blamed for broadening the current financial crisis and accelerating the latest breakdowns of investment banks such as Bear Stearns and Lehman. The practice of short-selling involves 'selling' (shorting) something you do not own and buying it back in the future (hopefully, at a lower price). The shares are 'borrowed' (from your stock broker) and must be returned. For example; if you sell short 1000 shares of ABC at $10 per share, your account is credited $10,000. Should the stock price drop to $8 you would then buy back (and return the borrow shares) at $8 x 1000 shares or $8,000. This yields a profit of $2,000. The investment risk - Should the stock price begin to increase (using the same example) to $15 per share you now have to pay $15,000 to return the borrowed shares for a loss of $5,000. **This is different from 'naked short-selling', where the investor cannot backup the underlying security. (i.e.; sells the stock 'short' without borrowing the shares) Critics claim that this practice is easily abused and can damage companies trying to raise capital. Online Stock Market Reviews presented live via the internet by Stephen Bigalow |
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