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Short selling back with a vengenance

This week saw the return of the short selling and Hedge funds and the market did not go unscathed with some australian stocks in free fall.

Soon as short selling was back the short sellers did not feel shy of bringing down some of their favorite stocks like Maquarie bank and westpac bank. The resources sectors were spared from their wraths. So times are not really looking good again for those companies with high debt and unbalanced balance sheets ,beware the short sellers are here and the hedge funds are back in business.

The financial sector tumbled 2.5 per cent on 25 may after the corporate regulator lifted its short selling ban this morning.

short seller

Results of lifting the short selling ban

Funds manager Perpetual experienced one of the biggest falls, down 8.9 per cent to $30.00; fellow funds manager AMP fell a more modest 3.8 per cent.

Reputed short selling target Macquarie Group was down 6.6 per cent to $31.28 - a little bit more than $1.00 below where the stock was immediately prior to the short selling ban being introduced.

Westpac was hit hardest among the big four banks, falling 3.61 per cent, while ANZ fared best, down only 1.4 per cent.

Unlike other share traders, short sellers do not 'own' the shares they sell. They sell them hoping that the price will fall before they have to hand over shares in settlement of the sale. That's how profits are made.

For example, there's a share on the ASX valued at $5. The short seller thinks the price of this share will go down, so the short seller goes onto the ASX and enters into a contract to sell that share. In order to settle the sale, the short seller might then buy a share in the same company and use that newly bought share to fulfil the contract.

Among australian stocks Property trusts like stockland and GPT and financial group challenger were also recently targeted by the short sellers. At the same time it might be a bit of a risky play for the hedge funds and short sellers to be shorting stocks when the stock market has been rising in past months.

  • If the short seller ends up buying the share at $3.00, the short seller makes a $2.00 gain. This is because the short seller had agreed to sell the share at $5.00.
  • But if the short seller has to buy the share at $7.00 in order to fulfil the sale contract, the short seller makes a loss of $2.00.

short sellers team

Naked short selling is effectively banned in Australia, with some exceptions. Naked short selling refers to when the short seller does not own the stock and doesn't have in place a prior arrangement to deliver the stock that will settle the sale.

Researchers says that short selling is not necessarily bad , but also helps regulate the unjust market prices of some overpriced stocks


Understanding 'Long', 'Short' and 'Short Selling'

Australian Securities and Investments Commission - Short selling


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