Wikipedia: short (finance)

자료: Wikipedia, http://en.wikipedia.org/wiki/Short_(finance)

In finance, short selling (also known as shorting or going short) is the practice of selling assets, usually securities, that have been borrowed from a third party with the intention of buying identical assets back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the assets between the sale and the repurchase, as he will pay less to buy the assets than he received on selling them. Conversely, the short seller will make a loss if the price of the assets rises. Other costs of shorting may include a fee for borrowing the assets and payment of any dividends paid on the borrowed assets. Shorting and going short also refer to entering into derivative contracts with an equivalent economic effect.
Going short can be contrasted with the more conventional practice of "going long", whereby an investor profits from any increase in the price of the asset.

Concept

To profit from a decrease in the price of a security, short sellers can borrow the security and sell it, expecting that it will be cheaper to repurchase in the future. When the seller decides that the time is right (or when the lender recalls the securities), the seller buys equivalent securities in order to return them to the lender. The process generally relies on the fact that securities are fungible, so that the securities returned do not need to be the same securities as were originally borrowed, and on the fact that there is a ready supply of securities to be borrowed from pension funds, mutual funds and other investors.
A short seller typically borrows from his broker, who is usually holding the securities for another investor who is holding the securities long; the broker itself seldom actually purchases the securities to lend to the short seller. [1] The lender of the securities does not lose the right to sell them, as the broker will usually hold a large pool of such securities for a number of investors which, as such securities are fungible, can instead be transferred to any buyer.
Short selling is the opposite of "going long". A short seller takes a fundamentally negative, or "bearish" stance, intending to "sell high and buy-back low", to reverse the conventional adage. The act of buying back the securities, which were sold short is called "covering the short" or "covering the position". Day traders and hedge funds often use short selling to allow them to profit on trading in securities which they believe are overvalued, just as traditional long investors attempt to profit on securities which are undervalued by buying them.
The terms "shorting" and "being short" are also used as blanket terms for tactics that allow an investor to gain from the decline in price of a security. Such tactics are generally based on a derivative contract, such as an option or a future. For example, a put option consists of the right to sell an asset at a given price; the owner of the option therefore benefits when the market price of the asset falls below that price, as he can buy the asset at the lower price and subsequently sell it under the option. Similarly, a short position in a futures contract means the holder of the position has an obligation to sell the underlying asset later at a given price, to close out the position; again, when the price falls below the given price the person with the short position can buy the asset and sell later under the future.

Worked Example

For example, assume that shares in XYZ Company currently sell for $10 per share. A short seller can borrow 100 shares of XYZ Company and immediately sell those shares for a total of $1,000. If the price of XYZ shares falls to $8 per share, the short seller can then buy 100 shares back for $800, return the shares to their original owner and keep the $200 profit (minus borrowing fees). However, if the shares of XYZ in fact went up to $25 following the short sale, and the short seller was required to return the shares, the short seller would have to buy back all the shares at $2,500, making a loss of $1,500.
Because a short position is the opposite of a long (normal) position, many features of the position are reversed compared to a typical trade. In particular, the profit (rather than the loss) is limited to the value of the security, but the loss (rather than the profit) is unlimited. In practice, as the price of XYZ Company began to rise, the short seller would eventually receive a margin call from the brokerage, demanding that the short seller either cover his short position or provide additional cash in order to meet the margin requirement for XYZ Company stock, which generally places a limit on the amount that will be lost.

History

Some theories hold that the practice was invented in 1609 by Dutch trader Isaac Le Maire, a big shareholder of the Vereenigde Oostindische Compagnie (VOC). In 1602, he invested about 85,000 guilders in the VOC. By 1609, the VOC still was not paying dividend, and Le Maire's ships on the Baltic routes were under constant threats of attack by English ships due to trading conflicts between the British and the VOC. Le Maire decided to sell his shares and sold even more than he had. The notables spoke of an outrageous act and this led to the first real stock exchange regulations: a ban on short selling. The ban was revoked a couple of years later.[2]

• Short selling has been a target of ire since at least the eighteenth century when England banned it outright.[citation needed] It was perceived as a magnifying effect in the violent downturn in the Dutch tulip market in the seventeenth century. 
• In another well-referenced example, George Soros became notorious for "breaking the Bank of England" on Black Wednesday of 1992, when he sold short more than $10 billion worth of pounds sterling.
• The term "short" was in use from at least the mid-nineteenth century. It is commonly understood that "short" is used because the short seller is in a deficit position with his brokerage house. Jacob Little was known as The Great Bear of Wall Street who began shorting stocks in the United States in 1822.[citation needed] (중략/abbr.)

(중략/abbr.)

Mechanism

Short selling stock consists of the following:

• The investor instructs the broker to sell the shares and the proceeds are credited to his broker's account at the firm upon which the firm can earn interest. Generally, the short seller does not earn interest on the short proceeds. 
• Upon completion of the sale, the investor has 3 days (in the US) to borrow the shares. If required by law, the investor first ensures that cash or equity is on deposit with his brokerage firm as collateral for the initial short margin requirement. Some short sellers, mainly firms and hedge funds, participate in the illegal practice of "naked short" selling (see below), where the shorted shares are not borrowed or delivered. 
• The investor may close the position by buying back the shares (called covering). If the price has dropped, he makes a profit. If the stock advanced, he takes a loss. 
• Finally, the investor may return the shares to the lender or stay short indefinitely. At any time, the lender may call for the return of his shares i.e. because he wants to sell them. The borrower must buy shares on the market and return them to the lender (or he must borrow the shares from elsewhere). When the broker completes this transaction automatically, it is called a 'buy-in'.

Shorting stock in the U.S.


In the U.S., in order to sell stocks short, the seller must arrange for a broker-dealer to confirm that it is able to make delivery of the shorted securities. This is referred to as a "locate.” Brokers have a variety of means to borrow stocks in order to facilitate locates and make good delivery of the shorted security.
The vast majority of stocks borrowed by U.S. brokers come from loans made by the leading custody banks and fund management companies (see list below). Depending on specific account agreements, brokers are able to borrow stocks from their customers who own "long" positions, particularly those in "margin" accounts. In these cases, and again, depending on account agreement, and only if the customer has fully paid for the long position, the broker may or may not be able to borrow the security without the express permission of the customer; the broker must provide the customer with collateral and may or may not pay a fee to the customer. In cases where the customer has not fully paid for the long position (meaning the customer borrowed money from the broker in order to finance the purchase of the security), the broker will not need to inform the customer that the long position is being used to effect delivery of another client's short sale.
Most brokers will allow retail customers to borrow shares to short a stock only if one of their own customers has purchased the stock on margin. Brokers will go through the "locate" process outside their own firm to obtain borrowed shares from other brokers only for their large institutional customers.
Stock exchanges such as the NYSE or the NASDAQ typically report the "short interest" of a stock, which gives the number of shares that have been legally sold short as a percent of the total float. Alternatively, these can also be expressed as the short interest ratio, which is the number of shares legally sold short as a multiple of the average daily volume. These can be useful tools to spot trends in stock price movements but in order to be reliable, investors must also ascertain the number of shares brought into existence by naked shorters. Investors are cautioned to remember that for every share that has been shorted (owned by a new owner), a 'shadow owner' exists (i.e. the original owner) who also is part of the universe of owners of that stock, i.e. Despite not having any voting rights, he has not relinquished his interest and some rights in that stock.

(중략/abbr.)

Short selling terms

Days to Cover (DTC) is a numerical term that describes the relationship between the amount of shares in a given equity that have been legally short sold and the number of days of typical trading that it would require to 'cover' all legal short positions outstanding. For example, if there are ten million shares of XYZ Inc. that are currently legally short sold and the average daily volume of XYZ shares traded each day is one million, it would require ten days of trading for all legal short positions to be covered (10 million / 1 million).

Short Interest is a numerical term that relates the number of shares in a given equity that have been legally shorted divided by the total shares outstanding for the company, usually expressed as a percent. For example, if there are ten million shares of XYZ Inc. that are currently legally short sold and the total, number of shares issued by the company is one hundred million; the Short Interest is 10% (10 million / 100 million). If however, shares are being created through naked short selling, "fails" data must be accessed to assess accurately the true level of short interest.

(중략/abbr.)

Naked Short Sale

A naked short sale occurs when a security is sold short without borrowing the security within a set time, 3 days (T+3) in the US. This means that the buyer of such a short is buying the short-seller's promise to deliver a share, rather than buying the share itself. The short-seller's promise is known as a hypothecated share.

When the holder of the underlying stock receives a dividend, the holder of the hypothecated share would receive an equal dividend from the short seller.

Naked shorting has been made illegal except where allowed under limited circumstances by market makers. It is detected by the Depository Trust & Clearing Corporation (in the US) as a "failure to deliver" or simply "fail.” While many fails are settled in a short time, some have been allowed to linger in the system.

In the US, arranging to borrow a security before a short sale is called a locate. In 2005, to prevent widespread failure to deliver securities, the U.S. Securities and Exchange Commission (SEC) put in place Regulation SHO, intended to prevent investors from selling some stocks short before doing a locate. Requirements that are more stringent were put in place in September 2008, to prevent the practice from exacerbating market declines. The rules were made permanent in 2009.

(중략/abbr.)

Markets

Futures and options contracts

When trading futures contracts, being 'short' means having the legal obligation to deliver something at the expiration of the contract, although the holder of the short position may alternately buy back the contract prior to expiration instead of making delivery. Short futures transactions are often used by producers of a commodity to fix the future price of goods they have not yet produced. Shorting a futures contract is sometimes also used by those holding the underlying asset (i.e. those with a long position) as a temporary hedge against price declines. Shorting futures may also be used for speculative trades, in which case the investor is looking to profit from any decline in the price of the futures contract prior to expiration.

An investor can also purchase a put option, giving that investor the right (but not the obligation) to sell the underlying asset (such as shares of stock) at a fixed price. In the event of a market decline, the option holder may exercise these put options, obliging the counterparty to buy the underlying asset at the agreed upon (or "strike") price, which would then be higher than the current quoted spot price of the asset.

Currency

Selling short on the currency markets is different from selling short on the stock markets. Currencies are traded in pairs, each currency being priced in terms of another, so there is no possibility for any single currency to get to zero. In this way, selling short on the currency markets is identical to selling long on stocks.

Novice traders or stock traders can be confused by the failure to recognize and understand this point: a contract is always long in terms of one medium and short another.

When the exchange rate has changed, the trader buys the first currency again; this time he gets more of it, and pays back the loan. Since he got more money than he had borrowed initially, he makes money. Of course, the reverse can also occur.

An example of this is as follows: Let us say a trader wants to trade with the dollar and the Indian rupee currencies. Assume that the current market rate is $1 to Rs.50 and the trader borrows Rs.100. With this, he buys $2. If the next day, the conversion rate becomes $1 to Rs.51, then the trader sells his $2 and gets Rs.102. He returns Rs.100 and keeps the Rs.2 profit.

One may also take a short position in a currency using futures or options; the preceding method is used to bet on the spot price, which is more directly analogous to selling a stock short.

Risk

It is important to note that buying shares (called "going long") has a very different risk profile from selling short. 

• In the former case(going long), losses are limited (the price can only go down to zero) but gains are unlimited (there is no limit, in theory, on how high the price can go). 
• In short selling, this is reversed, meaning the possible gains are limited (the stock can only go down to a price of zero), and the seller can lose more than the original value of the share, with, in theory, no upper limit. For this reason, short selling is usually used as part of a hedge rather than as an investment in its own right.

Many short sellers place a "stop order" with their stockbroker after selling a stock short. This is an order to the brokerage to cover the position if the price of the stock should rise to a certain level, in order to limit the loss and avoid the problem of unlimited liability described above. In some cases, if the stock's price skyrockets, the stockbroker may decide to cover the short seller's position immediately and without his consent, in order to guarantee that the short seller will be able to make good on his debt of shares.

The risk of large potential losses through short selling inspired financier Daniel Drew [Wasn't it Cornelius Vanderbilt???] to warn:

"He who sells what isn't his'n, Must buy it back or go to pris'n"

Short selling is sometimes referred to as a "negative income investment strategy" because there is no potential for dividend income or interest income. One's return is strictly from capital gains.

Short sellers must be aware of the potential for a short squeeze. When the price of a stock rises significantly, some people who are shorting the stock will cover their positions to limit their losses (this may occur in an automated way if the short sellers had stop-loss orders in place with their brokers); others may be forced to close their position to meet a margin call; others may be forced to cover, subject to the terms under which they borrowed the stock, if the person who lent the stock wishes to sell and take a profit. Since covering their positions involves buying shares, the short squeeze causes an ever further rise in the stock's price, which in turn may trigger additional covering. Because of this, most short sellers restrict their activities to heavily traded stocks, and they keep an eye on the "short interest" levels of their short investments. Short interest is defined as the total number of shares that have been legally sold short, but not covered.

A short squeeze is deliberately induced. This can happen when large investors (such as companies or wealthy individuals) notice significant short positions, and buy many shares, with the intent of selling the position at a profit to the short sellers who will be panicked by the initial uptick or who are forced to cover their short positions in order to avoid margin calls.

Another disadvantage, is that if a stock becomes "hard to borrow", which is defined by the SEC and based on lack of availibility, a broker will charge a hard to borrow fee daily, for any day the SEC declares a share is hard to borrow. This occurs without any notification to short sellers. Additionally, a broker may be required to cover a short sellers position at any time ("buy in"). The short seller receives a warning from the broker that they are "failing to deliver" stock, which will then lead to the buy-in. 

source: http://www.thestreet.com/story/862233/1/knowing-the-rules-of-the-shorting-game.html

Short sellers have to deliver the securities to their broker eventually. At that point, they will need money to buy them, so there is a credit risk for the broker. To reduce this, the short seller has to keep a margin with the broker.

Short sellers tend to temper overvaluation by selling into exuberance. Likewise, short sellers are said to provide price support by buying when negative sentiment is exacerbated after a significant price decline. Short selling can have negative implications if it causes a premature or unjustified share price collapse when the fear of cancellation due to bankruptcy becomes contagious.[15]

Finally, short sellers must remember that they are going against the overall upward direction of the market. This, combined with interest costs, can make it unattractive to keep a short position open for a long duration - unless naked shorters have been creating a significant number of counterfeit shares. (중략/abbbr.)