Shorting, also known as "to go short" or "short-selling" is one way in which investors can profit from a decreasing share price. Short selling is essentially the opposite to the long-term "buy low, sell high" strategy.
The process is as follows:
- The short seller identifies a stock they believe will drop in price in the coming months.
- An owner of the shares is approached and offered a cash fee (usually 0.3%-0.5% of the price) to allow their shares to be borrowed by the short seller.
- The shares are then sold and the proceeds received by the short seller.
- At some time in the future, the shares are then re-purchased by the short seller and transferred back to the original owner.
Short sellers make money when the value of the re-purchased shares is less than what the original shares were sold for, plus fees. Because of the risks and small market involved, short selling is a highly regulated and specialised investing market, with participants usually well informed of potential corporate news and company health. As a result, investors may use shorting statistics as a means of determining future market trends.
ASIC publishes short position statistics at a three day lag to the market (ASIC) from 2010 onwards. The following table shows the top 10 shorted ASX-listed stocks and their % of free-float shares shorted on 25/5/13 and 20/6/13, and the change over that time.
| Code |
25/05/2013 |
18/06/2013 |
Change (%) |
| FXJ |
14.92 |
17.92 |
+3.00 |
| JBH |
17.01 |
16.65 |
-0.37 |
| MYR |
13.24 |
14.28 |
+1.04 |
| PDN |
13.07 |
12.37 |
-0.69 |
| FLT |
11.62 |
12.02 |
+0.40 |
| ILU |
13.09 |
11.46 |
-1.63 |
| MND |
10.55 |
10.57 |
+0.02 |
| DJS |
10.42 |
10.33 |
-0.10 |
| WHC |
10.25 |
10.12 |
-0.13 |
| NWH |
9.93 |
10.01 |
+0.08 |
Based on the state of the Australian economy at present, it's no surprise that the majority of highly shorted companies are either retailers or from the mining/materials sector. These are seen as the areas most under threat by a weakening Australian and Chinese economy. Fairfax is shorted heavily due to the uncertainty surrounding the drastic change in business model being undertaken by the company.
A glance at the share price of the top 10 companies over the past month shows an even spread of performances, with David Jones (ASX: DJS), JB HiFi (ASX: JBH), Flight Centre (ASX: FLT), Whitehaven Coal (ASX: WHC), and Monadelphous (ASX: MND) having outperformed the ASX 200 (ASX: XJO), while Fairfax (ASX: FXJ), Iluka (ASX: ILU), Paladin (ASX: PDN), NRW Holdings (ASX: NWH), and Myer (ASX: MYR) have underperformed.
Foolish takeaway
The short position information available from ASIC can give investors an idea of the negative sentiment surrounding a stock, but a high percentage of sold short shares does not guarantee poor performance. Investors may be better suited understanding the trends in the statistics, such as a high amount of shorting in particular sectors, in order to make investment decisions.
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Motley Fool contributor Andrew Mudie does not own shares of any companies mentioned in this article.
