What is short-selling?
In an example from
But the stock market is never a sure thing. If the stock instead goes up in price, it can lead to losses for a short-seller.
If the short seller has to buy the stock back at a higher price instead of their expected lower price, it can drive up the stock price even further, creating what's known as a "short squeeze."
According to the Canadian Securities Administrators, short-selling in general is a "legitimate trading practice which contributes to market liquidity and price efficiency," that can prevent stocks from becoming overvalued and lets investors hedge their bets.
How does it work?
Some short sellers are considered "activist" investors, because they will publicly release a report or analysis explaining why they have concerns about a stock's price, a Canadian Securities Administrators report released last month said. This is different than an average investment fund, like a pension fund.
The CSA report notes that some short sellers view their work as a "first line of defence against fraud and subsequent losses." Famous short sellers include
But the CSA report also notes that the value or harm in activist short selling depends on whether the information these funds provide is accurate, and whether it is shared to manipulate markets or distort prices.
"Activism by short selling is premised on effecting a loss of shareholder value for the target issuer, which makes it controversial," the report said.
"Activist short sellers are also criticized for being driven by short-term trading profits rather than promoting long-run price accuracy. However, they can also serve as a countervailing check on the potential for excessive market optimism."
Does short-selling happen in
While
It found that between 2010 and
The CSA's consultation paper said that activist short-selling campaigns have spread faster in the age of social media — and that potential misinformation around a stock can spread quickly, too.
The
What about short selling upsets people?
This week, short sellers and investment firms like
On social media, some users had little sympathy for the funds' losses, as headlines cast stock buyers as a group of Davids downing hedge fund Goliaths.
The social media swell against short-sellers has also come to the fore during a pandemic that has widened economic equality.
Some social media users have pointed to the last financial downturn, when the idea of "shorting" became mainstream through Michael Lewis’ book “The Big Short," later a movie nominated for best picture at the Academy Awards.
“The same rich people that caused the market crash in 2007/08 are still in power and continue to manipulate the market to get even richer, we are just taking back our fair share,” one user wrote on Reddit.
This report by
— With files from
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