6. Short-Selling

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Из курса от партнера Indian School of Business

Trading Basics

325 оценок

Indian School of Business

Trading Basics

325 оценок

Курс 1 из 5 — Specialization Trading Strategies in Emerging Markets

The purpose of this course is to equip you with the knowledge required to comprehend the financial statements of a company and understand the various transactions that take place in the stock market so that you can replicate the strategies discovered by the extant academic literature. The first part of the course provides a brief introduction to financial statements and various common filings of firms. You will learn how to obtain information regarding a company's performance from them and use the information to build trading strategies. Next, you are taught basic asset pricing theories so that you will be able to calculate the expected returns of a stock or a portfolio. Finally, you will be introduced to the actual functioning of asset markets, type of players in the market, different types of orders and the efficient ways and opportune time to execute them, trading costs and ways of minimizing them, the concept of liquidity .etc. This knowledge is required to develop efficient algorithm to execute various trading strategies.

Из урока

Basics of Market Microstructure

This module will provide a detailed introduction to the actual functioning of asset markets. The module will cover essential details such as type of players in the market, different type of orders and the efficient ways and opportune time to execute them, trading costs and ways of minimizing them, the concept of liquidity .etc. This is required to develop efficient algorithm to execute various trading strategies. After completing this module you will have a clear idea of different types of orders and which orders to use when.

1. Market and Limit Orders4:55

2. Limit Order Book7:28

3. More Limit Order Book6:49

4. Limit Price Placement4:56

5. Stop-Loss Orders5:11

6. Short-Selling3:59

7. Other Order Instructions7:54

8. Liquidity3:27

9. Transaction Costs7:22

10. Implicit Transaction Costs8:38

11. Implementation Shortfall5:49

Познакомьтесь с преподавателями

Ramabhadran Thirumalai
Assistant Professor
Indian School of Business

[MUSIC]

In this video, we will discuss what short selling is and how you will

use a stop loss order to restrict your losses after you have short sold shares.

Last time, we assumed that you buy shares and

then restrict your losses by placing a stop loss order to sell.

The opposite is also possible.

Say you have information that the stock price is going to drop.

Ideally, you would want to sell the shares now and

buy them back after the stock prices drop.

How about if you do not own the sales?

Can you sell on the information that the stock price is going to drop?

The answer is yes.

Through what is called short selling sales.

And essentially short selling means that you are selling something that

you do not own.

How do you do that?

By borrowing shares from someone and

selling them with a promise to return the borrowed shares at a future date.

This is similar to taking a loan.

In a loan you borrow cash and promise to pay back at some future date.

In the case of short selling, the loan is for shares not cash.

Various countries have regulations on how this borrowing may be done.

Some countries may completely ban it, while others may ban it from to time for

various reasons.

You will have to check if and how you can borrow shares on your local exchange.

I do want to add a word of caution here that short selling is extremely risky

because stock prices in general increase over longer horizons of time.

It is not meant for

everyone, and also not advisable to hold such positions over long periods of time.

Let's say that you expect the share price of XYZ to decrease.

Because you don't own shares of XYZ, you decide to short sell shares in XYZ.

You're able to short sell 100 shares at $40 a share.

If your information is right, then prices will decrease, you

will buy the 100 shares back at a lower price, and return the borrowed shares.

However, if you're wrong, their prices may increase leading to losses

because you still have an obligation to return the borrowed shares.

You will have to buy the shares back at higher prices, which results in losses.

To prevent really large losses on account of price increases,

you enter a stop loss order to buy 100 shares at $44 a share,

you're willing to lose around 10% on this transaction.

As long as the stock trades and

prices below $34, your stop-loss order to buy is a trigger.

However, the moment the stock trades at $44 or higher,

it will trigger your stop-loss order, which will convert to a market order.

And will try to execute against limit orders in the order book.

Remember, a stop-loss order at $44 doesn't guarantee purchases at $44 alone.

The order is activated when the stock price reaches $44.

The actual price at which you buy the shares may be greater than, or

less than $44.

There is still price uncertainty, and

this is especially higher when prices are changing rapidly.

To reduce this price uncertainty,

you could place a stop loss order with a limit price.

When triggered, this would send a limit order to the market which will try to

execute against the order book subject to not exceeding the limit price.

Although it is common practice to place stop loss market orders rather than stop

loss limit orders, because there is some urgency in getting the order executed.

We will continue talking about different types of orders our traders may place in

the market next time.

We will look at various additional instruction you may attach to an audit.

[MUSIC]

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