Short Selling

If you buy low and sell high, chances are you’ll be richer and everybody will be happy. Sell low after borrowing high and you may be rich, but odds are quite a few people will be anything but pleased. That’s the short seller’s predicament, and why investors who bet that stocks will drop get threatened with everything from temporary restrictions to serious jail time, particularly during times of market turmoil. Shorts, as they’re known, say they’re keeping markets and companies honest. Critics say their practices can blur into market manipulation. Regulators are keeping a wary eye on them.

Short sellers borrow shares, sell them, buy them back at a lower price and profit from the difference — unless the stock rises. The biggest headlines these days are being made by so-called activist shorts, even though they account for only a small slice of short selling. Most shorting is done by hedge funds and institutional investors to cushion their investments against falling stock prices or to bet that shares have risen too high. Activists, on the other hand, research companies to find targets that they allege have dodgy business or accounting practices, spread the word (sometimes anonymously) and, if all goes as planned, watch the stock slump. Although activist shorts have been calling out companies for decades, their numbers have swelled thanks to the rise of social media as a platform for disseminating theories and analysis. In 2017, shorts began campaigns against 186 companies globally, versus 130 in 2013, according to Activist Insight Ltd. The campaigns have spread geographically, too, with shorts turning their attention to Australia, Japan, Singapore and South Africa. In June, the chief executive officer of Hong Kong-listed Samsonite International SA resigned after a short seller alleged he had falsified educational credentials. Many authorities dislike short selling — the former head of the New York Stock Exchange has described the practice as “icky and un-American.”