Impact of Short-sellers on Stock Market Performance.
You need to submit a research report (total of 5-6 pages) explaining the following things:
Who are short-sellers? What do they do?
Discuss the positives and negatives of short-selling activities.
What is the general investor opinion about short-sellers (cite examples from media articles)?
Discuss at least 4 recent instances where short-sellers caused significant volatility in stock
prices and what the outcome was (cite examples from media articles).
Sample Solution
Short-sellers are investors who bet against a stock by selling it at its current price, hoping that the price will later drop so they can buy back the shares for a lower price. They borrow the stock from a broker and sell it, then wait for the price to decline and eventually repurchase the same amount of shares at a lower cost to make a profit from the difference.
The positives of short-selling activities include increased liquidity in markets, improved market efficiency as more information is disclosed about securities, protection from market downturns due to short-seller hedging activities, potential profits if short positions are correct, and increased financial discipline due to incentives created by investing against companies. The negatives include potential losses if short positions are incorrect, large costs associated with borrowing stocks needed for shortsales (borrowing fees), reduced investor confidence if negative news or rumors spread by investors prove inaccurately damaging towards stocks (short squeezes), and risks posed to longterm shareholders as it incurs additional risk on an otherwise risky asset class (stocks).