Rendezvous with Short Selling:

Let's recap what Short Selling is:

• In a short sale an investor borrows shares, sells them, and must eventually reutrn the same shares (cover). Profit (or loss) is made on the difference between the price when the shares are borrowed compared to when they are returned.
• An investor makes money only when a shorted security falls in value.
• Short selling is done on margin, and so is subject to the rules of margin trading.
• The shorter must pay the lender any dividends or rights declared during the course of the loan.
• The two reasons for shorting are to speculate and to hedge.
• There are restrictions as to what stocks can be shorted and when a short can be carried out.
• Short interest tells us the number of shares that have already been sold short in a security.
• Short selling is very risky. You can lose more money than you invest but are limited on the upside.
• A short squeeze is when a large number of short sellers try to cover their positions at the same time and thus, drive up the price of a stock.
• Even though a company is overvalued, it may take a long time for it to come back down. Fighting the trend almost always ends up with trouble.
• There are some that see short selling as unethical and bad for the market.
• Short selling contributes to the market by providing liquidity, efficiency and acting as a voice of reason in bull markets.
• Some unethical traders spread false information in an attempt to drive the price of a stock down and make a profit by selling short.

Ethics and the Role of Short Selling: It's safe to say that short sellers aren't the most popular people on Wall Street. Many investors see short selling as "un-American" and "betting against the home team." Some hold short sales as a major cause of market downturns, such as the crash in 1987. There isn't a whole lot of evidence to support this, as other factors such as derivatives and program trading also played a massive role. Still, regulators have introduced rules that make it more difficult for short sales to push a market downward.

On the other hand, it's tough to deny that short selling makes an important contribution to the market. It provides liquidity, drives down overpriced securities, and generally increases the efficiency of the markets. Short sellers are often the first line of defense against financial fraud. While the conflicts of interest from investment banking keeps some analysts from giving completely unbiased research, work from short sellers is often regarded as being some of the most detailed and highest quality research in the market. Its been said that short sellers actually prevent crashes because they provide a voice of reason during raging bull markets.

However, short selling has a very a dark side, courtesy of a small number of traders who are not above using unethical tactics to make a profit. Sometimes referred to as the "short and distort," this technique takes place when traders manipulate stock prices in a bear market by taking short positions and then using a smear campaign to drive down the target stocks. This is the mirror version of the pump and dump, where crooks buy stock (take a long position) and issue false information that causes the target stock's price to increase. Short selling abuse like this has grown with the advent of the Internet and the growing trend of small investors and online trading.

How "naked" short selling happens: U.S. securities regulators issued an emergency rule on July, 2008, to limit certain types of short selling in major financial firms, including Fannie Mae and Freddie Mac.

Investors who sell securities "short" profit from betting that a stock is overvalued and its price is likely to fall. Short-sellers borrow shares, then sell them, waiting for the stock to fall so that they can buy the shares at the lower price, return them to the lender and pocket the difference.

The emergency rule, which takes effect on last July in the US lasted for several days, was specifically designed to prevent investors from making "naked" short sales, which occur when an investor sells stock that has not yet been borrowed. If "naked" shorting is done intentionally it is illegal.

The following explains how a "naked" short sale occurs (Considering the US markets): ## When investors call a broker to arrange to borrow stock to short, they are aware that short sales are subject to a standard three-day settlement period. This means the sell-side broker has three days to deliver the shares to the investor.

## The broker is supposed to locate shares available to short prior to executing a short sale and make a determination that the shares will be delivered to the investor within the three- day settlement window. However, there are certain exceptions to that rule.

## Some shares are on an "Easy to Borrow" list. For a stock on that list, investors can execute a short sale and the broker does not specifically have to locate, or contact the source of the shares that are being shorted. The broker has a "blanket" assurance about the borrowing capability for that security.

## There is also a "Hard to Borrow" list for securities that are difficult, or unavailable, to borrow. To short stocks on the "Hard to Borrow" list, brokers have to take additional steps to ensure that the stock is available to be shorted.

## If, for whatever reason, the shares are not delivered within the three-day settlement window, this is called a "fail to deliver."

## That "fail to deliver" essentially leaves the short- seller "naked," meaning he did not actually possess the shares he has sold.

## If shares have not been delivered for 13 days after a transaction has occurred, the broker must buy them back.

## The emergency rule from the U.S. Securities and Exchange Commission would require a short seller to borrow securities before executing a short sale for certain financial institutions. It would also require the investor to deliver the securities by the settlement date.

What is Capitulation??

A military term. Capitulation refers to surrendering or giving up. In the stock market, capitulation is associated with "giving up" any previous gains in stock price as investors sell equities in an effort to get out of the market and into less risky investments. True capitulation involves extremely high volume and sharp declines. It usually is indicated by panic selling.

After capitulation selling, it is thought that there are great bargains to be had. The belief is that everyone who wants to get out of a stock, for any reason (including forced selling due to margin calls), has sold. The price should then, theoretically, reverse or bounce off the lows. In other words, some investors believe that true capitulation is the sign of a bottom.

Sign of Capitulation and Role of Media:

The mass transfer of funds from stocks to safer investments and increased news stories on investors preferring their mattresses over the market replaced the go-go stories of the late 1990s, when investors poured money into dotcom stocks that had no fundamental strengths. This type of reverse is a good sign of a capitulation.

One fact which is worth mentioning here is that, media full of capitulation talk is a bullish indicator. This bullish sentiment invalidates the primary criteria for a capitulation, which is the total lack of any bullish sentiment for stocks.

Second, in real-time the media is wrong in its calls on market turns. The media is a good "misleading" indicator, one that you should almost always bet against. It was late in calling the 1987 crash, the dotcom bubble, and this kind of mayhem.

This time also a Financial Media Channel openly came in support of FIIs shorting in voilation of the SEBI's dictat.

In last February, the same media channel brought in one of its most pampered analysts from Religare Securities Ltd, who was openly asking all to sell the stocks when the markets was tanking, creating panic among the hapless small investors. Eventually after 2 (two) months the same stocks gave good opportuity to exit......

Should these kind media channels who behave irresponsibly during a market mayhem be banned......and the anchors or the analysts who shamlessly support these misdeeds, be pulled up??!!