Benefits and Pitfalls of Short-selling Shares

Analysis: The second largest United States financial firm, Wells Fargo was accused of having dishonest business practices. The company was fined for putting pressure on its investment brokers to sell loans to their clients (Zacks, 2016). This type of business is dishonest as well as unethical for any business. Morgan Stanley’s approach was to have internal sales contests and provided cash incentives worth up to $5,000 for selling securities bases loans (Zacks, 2016). This type of loan is an asset based loan which allows the investor to borrow cash against their securities. As many as 30 advisors took into the practice internally and the company reached $24 million in new loan assets (Zacks, 2016).

We utilized a long-short trading strategy. Our strategy industry focus was on the technology space. The reason we focused on the tech industry is because the tech industry is known for both hype-stocks that do not hold real value and stocks that offer exponential growth. We placed short positions against stocks that we felt were overvalued ‘hype’ stocks as well as low-growth potential legacy stocks, and placed long positions with stocks that fundamentally were both reasonably priced and had more room for growth.

Insider trading leaves general investors paying their losses – Besides using insider information to profit ahead of the general investing public. Insiders can also use the information they were privy to as a way to eliminate their shares ahead of others knowing the shares of the stock will plummet because of bad news about the company. Massive sell-offs will cause the price to drop tremendously.

If you short the stock at a dollar when the market is crazy, and the stock goes down to 20 cents in a stock market crash, you can make a profit of 80 cents. This takes a few months.

The purpose of this paper is to review the phenomenon of illegal insider trading in the United States financial securities markets. The analysis section of this paper (a) defines illegal insider trading, (b) explains the enforcement of laws and regulations concerning illegal insider trading, (c) review the pattern of illegal insider trading from 1996 through 2005, and (d) compares the problem of illegal insider trading in the United States with the problem in other countries.

To invest your whole savings in a company through stock is an important risk almost everyone will do in their lifetime. When investing in a company you see their financial records and can see if the company’s stock value will go up if you invest in them making your money increase as well. What if this company falsifies their records and in a couple of days the company and its stock value go from $90 per share to just a penny per share. You lose your money just because a company cheated and stole your money.

To be able to achieve that goal, hedge funds employ varied strategies. To understand hedge fund, let’s try to understand one of the strategies commonly seen, that is “selling short”. Let’s assume that we have two securities that are related to each other, that is, their price behaves similarly to the market conditions. They move in together over time. Let’s assume that at some point in time, they diverge for whatever reason. This divergence is seen as an opportunity to minimize the risks (or may be greediness!) and make big profits irrespective of how the market is performing. The hedge fund would buy security that is selling below its normal range, as it is expected to increase relative to A, and would sell security A short. “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 (usually a broker) with the intention of buying identical assets back at a later date to return to the lender.”

wiped off the entire investment of the investors. This led to the birth of Sarbanes-Oxley Act

1) Short selling a certain amount index fund, for the case is the QQQ, an ETF which tracks on NASDAQ.

For Commercial Bank Management class I read The Big Short and reflected on its contents. In this paper, I will describe my reading of the book and show how it relates to this class. I devoted about a week to this project—reading, reflecting and writing. During this activity, I kept notes on what I was reading so that I could better understand exactly what happened in terms of concepts like collateralized debt obligations, etc. But what most interested me about this activity was the human element of the story.

The two stories talk about the meteoric price surge in the stock of a company called Cynk Technology Corporation, with no actual revenue and tangible assets, and the purported manipulation of the stock price through a “pump and dump” strategy. It can be seen how the Securities and Exchange Commission together with the Department of Justice opened an indictment charging several people with conspiracy, tax fraud and money laundering involving up to $500 million in assets routed through offshore shell corporations that allowed clients to influence stock prices and hide their gains. Generally, the fraudsters take control of an enterprise and offer to sell a chunk of shares usually to the unsuspecting public with promises of very high returns. Promoters broadcast the company’s prospects by telling financiers to get in early before the rest of the market dives in — the pump. Shares are often bought and sold between fraudsters to give the appearance of active trading, further amplifying interest as brokers contact clients to buy the stock. Once the price starts rising, the control block can be dumped on the market, leaving investors with shares in a nearly worthless business (Bouraoui, Mehanaoui & Bahli, 2012). It also parleys the increase of penny stock fraud and the Securities and Exchange Commission’s inability to prosecute the fraudsters and protect investors.

2 MotivationShort Interest ratio has been of interest to many hedge funds that trade on fundamen-tals of the firms. During our literature survey, we observe that some studies suggestthat high levels of short interest predict future returns, but the rationale behind thisthis predictability is not well understood. There are various theories that lead todifferent interpretations. One of the study suggests that stocks are overvalued in thepresence of short sale constraint and hence the subsequent negative abnormal returnsrepresent a correct of this overvaluation. Second suggests that short interest sellersare highly

In the corporate finance part of the hand book; gives opinions to rational managers in a mispricing market and gives examples for “market timing”.

1.1 The recent global economic crisis has seen an unparallel shift in the global perception of free markets. Regulators around the world have adopted a more strict regulatory approach to markets than seen previously. Short selling is been given particular attention from authorities due to its speculative use and questionable moral nature. As in the past, “short selling has been a favourite whipping boy”.

* advising another person to purchase or sell securities on the basis of inside information.