Short-selling
City traders have started the year with a rash of short selling targeting some of the stock market’s biggest names. The HUT Group, Asos, Ocado Bohoo and AO World have all been subject to the practice – reported on the This is Money website – part of the Mail Online group. Neil Craven of the business desk for the Daily Mail and Mail on the second Sunday in January reported on the short selling by city traders of the HUT Group – owner of many beauty and fashion brands – causing the share price to fall. He noted: “The number of contracts out on loan – so-called short positions which controversially allow investors to profit from a drop in the share price – have doubled in the past fortnight, hitting a new high. The value of shares held by short-sellers is now £110million. The sustained short attacks are threatening to derail a recovery in the share price. They come despite persistent rumours that the company’s billionaire founder Matthew Moulding, also its largest shareholder, may seek to take it private.”
Short-selling is where a trader borrows shares and sells them at the market price hoping they fall in value. They then buy them back at a lower price before returning them to the owner having made a profit equal to the difference in price. GameStop was the subject o short selling last year but fans rallied and pumped in cash to restore the share price so it doesn’t always work.
Famously in the 2015 movie The Big Short trader Michael Burry played by Christian Bale realises the USA housing market is about to collapse due to sub-prime mortgages loaned by the banks to people who can’t repay the loans. As the first to see this he makes a series of loans of shares to short sell knowing the shares will fall in value – which happened – creating the 2008 Credit Crunch. Burry made a lot of money from the practice – an activity repeated from time to time by other traders spotting overpriced businesses but it remains a controversial activity.
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