FAQ

Explanation: What is meant by short selling of stocks?

A short sale is generally the sale of a stock that you do not own. If you speculate on a falling price of a stock, you can profit from the falling price through a short sale. The way it works is relatively simple: specifically, you borrow shares and sell them at the current price. If the price has fallen, you can buy the shares back (you cover the short) and keep the price difference minus the borrowing fee as profit.

Why would you sell securities you do not own?

Securities dealers, traders and investors can use a short sale to profit from a price decline. Just as you go “long” and buy a stock in order to earn from price growth, you can go “short” with a short sale. In doing so, you sell a stock that has only been borrowed. If you buy this stock back at a later point in time at a lower price, you cover this short position. The price difference minus the borrowing fee then corresponds to the profit from the trade.

What are the risks of short selling?

The biggest risk with short selling is that the price does not fall but continues to rise. In some cases, massive exaggerations can also occur when there are many short sellers and the price moves massively in the other direction. Examples of such “short squeezes” have historically occurred with stocks such as VW, Tesla and GameStop.

What are examples of short selling?

There are many examples of short selling. A very well-known one in Germany was the recent short selling of Wirecard shares. Short sellers had bet against Wirecard and on falling prices long before the irregularities became known. An overview of all relevant short sales is available on shortsell.net.

What are “covered short sales”?

Covered short sales are the classic form of short sale. Here the trader must borrow the shares he wants to sell short. The lender receives interest for the lending period, which varies depending on demand and the volatility of the stock. With this type of short sale there is no delivery risk, i.e. the risk that the trader cannot cover the shares at all. Many brokers offer this service themselves and share the income with the securities account holders who allow securities lending.

What are “naked short sales”?

With naked short sales, also referred to as naked shorts, the shares are not borrowed before the short sale. The short seller therefore bears a higher risk, as he must deliver the shares to cover the short sale. If trading in the stock is suspended or there are no shares available, the short cannot be covered. Such short sales are not permitted in Germany.

What is the source of the data?