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What is short-selling?

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What is short-selling?

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When markets go into free fall, governments often blame speculators and particularly the process known as short-selling.

In an attempt to end the volatility and restore confidence regulators in France, Spain, Belgium and Italy have vetoed trades by investors who profit from market anxiety by betting on falling share prices.

A short seller does not actually buy his chosen share, instead he borrows it from a lender – normally a share broker – depositing just a portion of the cost.

Then he sells it at the current higher price and if the price does go down he buys it back later, cheaper.

The share is then returned to its actual owner – the broker – and the speculator pockets the difference.

Obviously if the price of the share goes up rather than down the investor loses out.

European fund managers have been very critical of the temporary short selling ban – calling it a Band-Aid being applied to a wound that needs many stitches.

They say these restrictions are more likely to create erratic trading than eliminate it.