What is Short-Selling and why the ban in some European markets?

Short Selling as I explained to my younger brother is that; I borrow his nike school bag and sell at a price let’s say GHC 2.00 and then hope for the price of the same nike school bag to come down to GHC 1.00 in the market. And after that I quickly buy the same nike school bag for him at the current market price of GHC 1.00 leaving me with GHC 1.00 of which I pay him a lending fee ( 0.20p) and keep the rest. (0.80p).
It is quite obvious in the case that, if the price of the nike school bag rises from GHC 2.00 to GHC 3.00 after I bought from him, I would make a loss of GHC 1.00 since I have to return his nike school bag (by buying) for him to go to school. In a more matured example, I approach an Investor of Company A to lend me 1000 shares which currently trades at $ 100 per share. (i.e. $100,000) then I sell those shares at $100 per share hoping for the price to drop to $50 per share. When that happens, I buy the same 1000 shares of Company A at $50 per share and give back to the Investor of Company A with the lending fee whether the value decreases or not. The market can turn in favour of the Investor too.
Short selling of assets mostly occurs in the securities markets and most experts allude market volatility to it. In most European markets, short selling has been banned to reduce market volatility. France, Spain, Belgium and Italy are prohibiting short sales on bank stocks and it is likely other countries would follow.
Investors are now skeptical of what would happen to the market now that short-sellers are out.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.