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Short selling is something done by individuals who invest in securities. Traditionally, hundreds of years ago, a security was property pledged to someone who was lending money that would guarantee a debt from the owner. Today, it refers to something similar, but the term is broader. It can be applied to any proof of ownership or debt that has been given a value, and that can be sold.
When an investor participates in short selling, they borrow a security from their broker and sell it on the open market. The seller then makes plans to buy that same security back. They want to do so at a lower value. When an investor does this, they make money.
The investor is anticipating that the security is going to drop in price, and if and when it does, they make money by buying it back at a cheaper price. If their hunch is wrong, however, and the security goes up or it remains at the same in value, the investor loses their money or just breaks even. It is all a game, and sometimes an evil one. This type of thing is seen by many as being a large contributor to the financial crisis that took place in the US in 2008.
Investments and the Pandemic
What does all this have to do with the coronavirus, however? A lot. Once the virus hit many developed countries in recent weeks, stock markets globally began whirling for a safe spot to land. Stores have closed, restaurants have shuttered their windows, and companies are actively downsizing in search of economic safety. Where are investors to turn?
With the financial future of just about everything, everywhere, playing out in unpredictable ways due to COVID-19, people are scrambling. Some are losing a lot of money and others feel they could now be finding the perfect opportunity to cash in. How? One of the ways investors could do this is, you got it, by betting on some securities and participating in short selling. With the values of stocks going down all the time, it is a beggars feast, in some ways.
Bans in Europe and Asia
Financial authorities are aware of this, however. Many are not allowing a free-for-all to take place in their country. Earlier in March, the UK’s Financial Conduct Authority banned short-selling of 140 Italian and Spanish stocks for 24 hours. South Korea has banned short selling altogether for six months, beginning on March 16.
Spain’s regulator has prohibited short selling until April 17, Italy’s Commissione Nazionale per le Società e la Borsa has banned it for three months starting on March 18, France has also banned the practice until April 17, and Belgium and Greece are following suit.
Will the US implement its own ban on short selling? Since it has not done so to date, it remains to be seen, but it looks like it may not. If this is a good move or not depends on what side of the proof of property you may sit on. Is it time to buy or sell?
About the Author
A prior educator with a background in the arts, Victoria Simpson has a passion for communicating her ideas through writing. You can find her picture book, Eating I Forget, on Amazon. Her articles and webcopy have been published on countless websites including RateMDs.com, Autoguide, eBay, Digital Home and Iremia Skincare, among others. She is now excited to be contributing to World Atlas.
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