How To Profit From Downward Movements
Traders often remark that shares fall faster than they rise, noting that announcements of failed deals or poor earnings seem to drive stocks down even more than a good report will cause it rise.
Crowd behaviour is most likely to blame for this phenomenon. Whilst traders are quick to buy a stock after positive news is released to the market, they are even quicker to sell a stock after a bad report comes out. Fear takes over as the level of buying decreases, causing the level of selling to increase, thereby driving the stock down.
What many investors do not realise is that there is a way to profit from this panic selling. This process, similar to "shorting" but not exactly the same, is called Securities Lending.
So just what is Securities Lending?
Securities Lending is a process whereby, upon client request, we will sell stock that you have not actually bought. In order to do this, we must first locate the stock from another financial institution. We then borrow the available stock and lend it to you for an undefined period of time.
This means that if you expect a share price to fall, you may actually borrow the stock and sell it before buying it. If the price declines as expected, you can then buy back the stock, after which we return it to the lender and the difference between the initial price sold and the price the stock was purchased at is the profit.
Advantages of Securities Lending vs Short Selling
When you use our Securities Lending facility, you are able to sell any stock listed on the Australian Stock Exchange, subject to any conditions we may impose. This is unlike short selling, whereby only stocks approved by the ASX for short selling may be sold short. Furthermore, with short selling, the stock must be bought back within 3 days otherwise fail fees apply. With Securities Lending, there is no time limit to close out the trade. Securities Lending also allows the seller to "sell down to the bid", whereas when short selling, the ASX have a rule in place whereby you can't sell down below the last traded price.
The Mechanics of Securities Lending
 You can short sell any stock on the ASX provided that the sufficient quantity of shares is available to borrow. Your advisor will inform you of the availability of a particular stock in the event you would like to short sell.
Minimum brokerage on the short sale is $100. There is NO minimum dollar amount to short sell. There is an additional $25 line fee on every sell. GST is not applicable to the borrow fee.
You will need a minimum cash deposit margin of 20% of the trade size in your trading account before your advisor can execute a selling trade.
For example, if you were to short 20,000 XYZ shares @ $1 (trade size $20,000), you will need at least $4000 (20% * $20,000) in your account before the trade can be executed.
If your short sell a stock over its ex-dividend date, you will be required to pay the "buyer" of your stock, cash that is equivalent to the dividend declared by the company, as well as the franking credits.
There are no time limits on when to buy-back the short position. However, if we call back the stock (due to the rare occasions that the institution recalls the stock from us), you must close out the trade by buying it back.
NB. Conditions of Securities Lending are subject to change at any time.
Securities Lending - Sample Trade
SELL 1,000 LLC @ $17.90 = $17,900
20% Margin = $3,580 cash deposit
1% Brokerage = $179
BUY 1,000 LLC @ $13.20 = $13,200
1% Brokerage = $132
Gross Profit (1,000*$4.70) = $4,700
NET PROFIT ($4,700-$311) = $4,389
Return on Investment = $123%
Securities Lending - Margin Explained
20% Margin must ALWAYS be maintained on the trade.
24hr Margin Calls are made if the trade goes against you.
Eg. Sold 20,000 XYZ @ $1.00 ($4,000 cash margin)
Next day, XYZ closes @ $1.05 - Additional margin requirement is $1,000 (20,000*$0.05)
Securities Lending - Dividends
If you have used securities lending to "short" a stock and it pays a dividend during this period, then you are liable for the amount of the dividend and the associated franking credits (unless the stock is borrowed from overseas). Since you borrowed the stock from somebody who essentially is still the 'owner' of the stock, they are entitled to the dividends.
The following is a worked example:
Day 1 - SELL 1,000 XYZ @ $20.00 (cum-dividend)
Day 2 - XYZ declares a 64c fully franked dividend going ex on day 10
Day 10 - XYZ is trading ex-dividend (ie. If you held the stock at the close of business on Day 9 you are entitled to the dividend)
We will debit your account for $1,000 made up of $640 (dividend) and $340 (franking credits)
Article written by Robert Lederer, an ex-equities dealer.
| Related Books |
The Art of Short Selling
ISBN: 0471146323
|
The Art of Short Selling
by Kathryn F. Staley
A guide for serious investors illustrates in detail the entire process of short selling for profit; explains how, when, and why to sell short; and provides current trading examples, guidelines and pertinent regulatory information.
To "sell short" on Wall Street, an investor finds overpriced stocks and then deals them before actually buying them. Regularly falling in and out of favor, the discipline remains one of the financial market's highest-risks but most profitable practices. The Art of Short Selling by Kathryn Staley, an expert in the field, uses examples and instructions to show how it can be done successfully--while cautioning that it "is not for the faint of heart."
The first book that shows serious investors how to cash in on the latest investing trend—short selling
Few Wall Street investors will ever forget the billions George Soros netted in his infamous short selling of the British pound. Now Kathryn Staley shows the rest of us how short selling works. Her timely guide takes readers through the entire process of short selling, from what it is to exactly how, when, and why to sell short. Up-to-the minute trading examples, guidelines, and pertinent regulations clearly illustrate the most current applications and techniques of short selling.
KATHRYN F. STALEY is a registered investment advisor and CFA who specializes in short selling for the money management firm of Gilder, Gagnan, Howe & Co. She teaches financial statement analysis classes at Northwestern University for the Association of Investment Management and Research (AIMR).
|
Sold Short
ISBN: 0471383384
|
Sold Short : Uncovering Deception in the Markets
by Manuel Asensio
A guide to selling, offering an almost satirical look at the practice of short selling stock, as told through the life story of an influential short-seller. Reveals industry secrets and the facts behind the allegations and accusations against the author, showing the reader how he conducts his meticulous research.
Most companies play by the rules, releasing accurate information and making a genuine effort to create value for shareholders. But occasionally a company and a group of stock promoters will deliberately withhold damaging information, disseminate incomplete or false information, or simply make-the-whole-thing-up. When this deception is publicly disclosed, all sorts of accusations and denials will fly, but experience has shown that sooner rather than later the company will disappoint and its stock will likely decline sharply. And anyone selling short the stock of such a company will profit when it crashes. Manuel Asensio is probably the world's most visible practitioner of this brand of hostile, adversarial short selling.
In this lively and often funny book, Manuel Asensio not only recounts his recounts his "greatest hits" but also shows how you can identify shaky stocks yourself - and how to profit when you do. These stories reveal that anyone - giant accounting firms, senior exchange officials, distinguished politicians - can get caught up in the complex web of a stock scam. Who knows? Your portfolio might have one or two of these stocks in it right now. Better find out before Asensio does.
Manuel Asensio (New York, NY) is founder and Chairman of Asensio & Co., Inc. He has over twenty years of corporate finance and research experience. He has been featured in Business Week, Fortune, Forbes, Worth, the New York Times, New York magazine, and the New Republic, among other leading publications.
|
|
You are at 
