Short Selling: An Important Tool for Price Discovery and Liquidity in the Financial Marketplace

This presentation gives users valuable information about how hedge funds and other investors participate in the marketplace through short selling.

As the presentation describes, short selling generally means borrowing an asset (a security/stock, commodity futures contract, and corporate or sovereign bond) from a broker and selling it, with the understanding that it must later be bought back (hopefully at a lower price) and returned to the broker.  The short seller then closes out the short position by buying equivalent securities on the open market, or by using an identical security it already owned, and returning the borrowed security to the lender.

As many news stories highlight short selling as a negative force in our markets, the new presentation explains how short selling can be a way for investors to communicate their view on the price of an asset.  Short selling also provides many other critical benefits to investors, including:

  • Risk management for hedging long positions and managing portfolio risk
  • Increasing efficiency in the marketplace because the transactions inform the market with their evaluation of future stock, bond, or commodity price performance
  • Lowering overpriced securities by encouraging better price discovery
  • Providing liquidity by increasing the number of potential sellers in the market

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Short Selling: A Brief Overview and Regulatory Update:

Short selling is a strategy that helps investors manage risk and balance investment portfolios. This presentation provides an overview of short selling, its role in the marketplace and various regulatory efforts that shape how it is used in the marketplace.