The cost of shortselling (finance) Essay Example | Topics and Well Written Essays - 3000 words

The cost of shortselling (finance) - Essay Example procedures are discussed in depth to show that the chances of making a profit through short selling are as high as incurring a loss due to this activity. It all depends on how accurately an operator is able to predict the future market movements of stocks that are sold short. Mutual Funds hold largest number of stocks and are the most active operators in stock market. So, some analysts feel that if the additional costs related exclusively to short selling are added to the average cost of transactions undertaken by Mutual Funds, a correct value of the costs of short selling can be obtained. But the reasons why this approach would never give a true indication of short selling costs have been explained in a cogent manner. Finally, the assignment ends with a strong argument against branding short sellers as precursors of misfortune. â€Å"Short selling† is a very common term in stock exchanges. In simple terms, if a seller sells stocks which are not owned by them, then they are selling it short. This is possible if the seller borrows those stocks from a broker for a limited period and would return those stocks later. In order to do this, the short seller must have an account with the broker. That account could be either cash account or margin account. A cash account requires all transactions to be settled in cash while in a margin account the broker comes forward with finance or securities, as the case may be, to fulfill temporary requirements of the investor. The investor has to; of course, provide collateral securities for all the shares that they borrow. One of the most pertinent costs of short selling is the interest foregone on the securities that are presented as collateral to the broker. A short seller undertakes these transactions because they have a hunch that the price of securities would go down in future. So when they would buy those stocks from open market for returning to the broker they would be able to do so at a lower price than at which they had