Short Definition
October 16th, 2008 by jackieannpatterson | No Comments | Filed in Glossary
Shorting is simply selling a stock you have borrowed but you haven’t yet bought. The idea is to sell when the price is high and buy later when the price is lower. Buying the stock then closes the short trade as the stock is paid back to the lender (usually the broker).
Details on how to sell short are in Sell and Sell Short
Extra Insight:
Short selling is more difficult to model for backtesting because not everything is reflected in the price. Extra rules are imposed by the SEC such as no shorting until the price ticks up. The SEC recently removed this one. The stock also needs to be available to short — meaning someone has to be willing to lend out the shares. Often shares are not available when the price is in free fall. As we see in the current crisis, new rules are created on the fly such as the one-month hiatus on shorting bank shares. To be super-accurate, a model would need to have different shorting rules for different dates– something that is beyond the scope of most backtesting engines. The upshot is that backtesting doesn’t model short strategies as well as it does long strategies.
Risk management is more important for short selling because a short seller loses money when the stock rises without limit. In contrast, a buyer of a stock can only lose as much as they paid for it.
A portion of the proceeds of a short sale are available immediately. Some traders (and mutual fund managers) will use the proceeds to buy shares of a different stock thus making their money go farther.
(Backtesting Blog is an Amazon Associate
Updated 11/12/08.
Tags: backtesting, Elder, long, management, risk, selling, short, strategy
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