What is it?
Short selling, also known as shorting or going short, involves borrowing assets (e.g. shares) from a lender, in exchange for a lending fee, in order to sell them. The short seller aims to buy back identical assets at a later date for a lower price in order to return them to the lender. Short selling is therefore a gamble on the value of the assets falling. If the price falls, the short seller makes a profit of the difference in the selling and buying price (minus the fee paid to the lender). The practice has been criticised because it may lead to market volatility, and may tempt unscrupulous investors to damage the reputation of a company or asset in order to drive its price down.
Why is it in the news?
A group of small oil and gas companies are taking legal action against some anonymous users of online investment bulletin boards, who it claims have been persistently posting untrue and malicious information and rumours about their companies’ health. It is thought that the misleading bulletin board messages are intended to drive down the companies’ share values so that the users can profit from short selling. Two energy companies, Nighthawk and Nostra Terra, have already used the courts to force the two biggest bulletin boards, iii and ADVFN, to reveal the identities of the worst offenders. It appears that several malicious users have set up dozens of online identities in order to add credibility to their claims.
How can I use it in class?
- What are the arguments for and against short selling?
- How easy is it to drive the price of an asset down by posting rumours and misleading information? Is it acceptable?
- Is it right that anonymous users’ identities can be revealed?
Students visit the investment bulletin boards (e.g. iii or advfn) to find some interesting recent postings. They should decide (a) if the postings are likely to push the share price up or down, (b) if it is possible that the postings contain malicious rumours, and (c) how they could check the information in the postings.
Where can I read about it?
- AIM oil companies take action over bulletin board 'lies', Telegraph, August 10th 2010.
- Nighthawk threatens to sue 'libellous' internet critics, Independent, August 10th 2010.
- Oil minnows ready to launch action on online ‘sabotage’, Daily Mail, August 9th 2010.
- Short, Wikipedia.
- Short Selling: What Is Short Selling?, Investopedia.