Short Selling Mechanism

Short Selling Mechanism

The Short Selling Mechanism or Empty Sale mechanism; is selling a security before owning it. with an intention to buy it later at a lower value, and thus achieving a profit equivalent to the price difference between the short selling price and the purchase price minus the interest. that the investor pays for borrowing the security in the period between buying and selling.

In other words, this mechanism allows the investor to borrow securities from someone for sale, and then buy them back, to give them back once again to their original owner, and this is in exchange for interest. This policy is usually used only if the investor expects the price of a security to decline as a commercial share or bond in the near future, which is the total opposite of the term “Long Selling” which is buying a security or stock to profit from the price rise in the future.

However, and for what has been going on in the markets from lack of symmetry and stability due to the “zero” transactions, i.e. buying stocks in the morning and then selling them at the end of the session, the security-borrowing mechanism has been activated in Egypt since 2018. Where the provisions of Articles 298 and 289 of the executive regulations of the Capital Market Law no. 95 of 1992 have been amended; and this is to allow securities brokerages to start the securities trading activity for the purpose of selling and to increase the trading rate in the Egyptian market.

This mechanism (Short Selling Mechanism) is a win-win, where the investor benefits from the difference between the two prices, the original owner of the security can benefit by generating him a return, as he lends those securities to a percentage equivalent to the percentage of lending and discount, in addition to the ability to obtain their dividends on periodically; allowing him to achieve new investment goals.

Now, how can you as an investor benefit from this mechanism? Here are some suggestions;

Short selling mechanism benefits

1- As an investor, you better use short selling only on the bearish trend, do not try to use it in profit-taking areas.

2- Attempting to open short positions at the peaks isn’t the best you can do, you better wait for some sort of confirmation that their stocks are going downwards.

3- Use index documents as they are easier to analyze than stocks at the time of a drop.

4 – Target bearish prices and do not keep the short sale running for long periods.

5- Remember that; while you are conducting short selling deals, you are actually working against the general rule of growth and scarcity, which is the nature of markets.

6- Short selling will change the way usual markets functions on the short term, so try to invest with small quantities.

7 – With Short Selling, the term “hedge” will appear, where the best strategy for a long-term investor who is holding his stocks for one reason or another, is that he can sell their index documents until the bearish trend ends, which allows him to equate the fall-sown of his shares.

Read more: The Financial Regulatory Authority (FRA)

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