Waria-it doesn't have to be the broker who freezes the cash in Kizee's account.

Infact,for the NSE,CDSC would probably do the freezing of the cash. It did something similar for Equity & other banks that were doing marginal lending during the Safcom IPO.


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Waria- please stop eating bariis (sp) with porridge.

Anyway,if you are the long-term holder of Equity,yer you still get your fee income.

However,if you are short-sell,you my friend will have made (13.45-20-0.40)*50,000 = (347,500) loss.

Short-selling is just a investment like buying except you are betting on shareprice fall not a rise. Therefore,if share rises,you make a loss.


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Ecstasy-you explained it better than me. Except original shareholder in effect gets a bonus during the drop in his share's value

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How does a short sale work: two examples below

Simple analogies from the book Web of Debt by Ellen Brown:

'Pretend that you borrowed your neighbor's lawn mower,which your neighbor generously says you may keep for a couple of weeks while he's on vacation. You're thinking of buying a lawn mower anyway so you've been researching the latest sales and have seen your neighbor's lawn mower on sale for $300,marked down from $500. While you're mowing your lawn,a passerby stops and offers to buy the lawn mower you're using for $450. You sell him the lawn mower,then go out and buy the same one on sale for $300 and return it to your neighbor when he returns. Only now you've made $150 on the deal.'

Another analogy: 'You believe Amazon is overvalued and its price is going to fall. So as a short seller,you borrow Amazon stock which,like the lawn mower,you don't own,from a broker and sell it into the market...You borrow and sell 100 shares of Amazon at $50 per share,yielding a gain,exclusive of commissions,of $5,000. Your research proves correct and a few weeks later Amazon is selling for $35 per share. You then buy 100 shares of Amazon for $3,500 and return the 100 shares to the broker. You then have closed your position,and in the meantime you've made $1,500'.

According to Web of Debt,'It sounds harmless enough when you are borrowing your neighbor's lawn mower with his 'generous permission.'...The price is not responding to 'free market forces'. It is responding to speculators with the collisive battering power to overwhelm the market with sell orders - orders that are actually phoney,because the 'sellers' don't own the stock.'

Many experts will tell you that today speculators only have to drop the price low enough to trigger the automatic stop losses and margin calls of big mutual funds and hedge funds in the US. As a strategy for trading through a recession,some people in the US believe that short selling sustained the great depression in the 1930s. Short selling is not a solution to anything and is more likely a tool in spreading panic like wild fire.

SCUBI

I sense some fears. Fears of the unknown which are completely understandable and I’ll try and address some of them.

Solloh-it’s just an example,but in practice,short-selling has exactly the same consequences as going long on the share. Profits and losses are only limited by one person. You the investor selling or buying the share to close your position.

Scubidu- by your copying and pasting some googled article,I assume you believe that story. I won’t dissuade you otherwise.
Drake- I appreciate your logical approach so I’ll respond in kind:
· You understanding of opportunity cost is interesting. Kizee never had the cash from sale of Equity so there is zero OC. That is MainaT’s cash which is being protected.
· Notice the deposit for the margin call is again to secure the broker in a situation where the trade goes against Kizee and Kizee absconds (and I apologise for using you as an example Kizee). Re the dividend cover,Kizee would have been well aware of the dividend so no issue. Infact,the cash flow issue that you are alluding to from Kizee’s pt of view is much much smaller than if Kizee had to wait for Equity to get to Ksh12,buy the full 12*50,000 shares and wait or it to up to Ksh13.45 while he waits to realise some profits.
· In practice,if the market was opened up to short-selling,MainaT could still wake up one morning and decide to get his shares back without affecting Kizee. In the same way that if you want to buy 50,000 Equity shares today,you can easily get them because there is liquidity in the market for the share.
· With the exception of the small margin call cash,that Kizee will be required to put aside at the outset,the cashflow impact here is very positive for everybody concerned. MainaT gets to have some cash during a period that would otherwise be depressing (i.e. watching his portfolio go down in value). Kizee gets to trade on Equity on its way down and may even be able to raise cash such that he can go long on equity at Ksh12.
· Returns are risk-adjusted because we are assuming that in the same way you buy a share knowing it can go up or down in value,you will short-sell it knowing that it may go up.
· In the absence of the momentum to change the underlying causes of the current bearish stance in the NSE (economy),short-selling will reduce the flight of liquidity that happens far too often. Without a certain amount of liquidity staying here,the NSE won’t grow to be the vibrant capital market that it can be. EFT like current bonds,will merely take away that liquidity.
· I do agree we need a commodities exchange,but I’m sure that it’ll also cause some to have fears of the unknown.

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