It doesn't - you take a bet that 'fundamental' factors will cause it to drop in price. The idea that short-sellers can affect the price of an asset simply by taking a bet is a myth. If that was the case, the favourite would always win.Cheers yoganmahew, that's a nice easy to understand explanation of shortselling.
Taking the same analogy though, I'm still not sure why selling the apartment for 200k would cause it to drop in value. I'm sure smiley probably has the answer to that one.
So my understanding wasn't wrong after all then!!! I thought there might be some hidden feature of shortselling that could bring markets down. It's been blamed for so much lately.It doesn't - you take a bet that 'fundamental' factors will cause it to drop in price. The idea that short-sellers can affect the price of an asset simply by taking a bet is a myth. If that was the case, the favourite would always win.
I was thinking about this last night in bed (yes, sad, isn't it) and the only way I could think of that short-sellers could influence the price of shares is that if enough people short a particular share, it might cause some of the people who hold the share to look again at the 'fundamentals' and make sure that they are still happy with their growth/dividend assumptions. But really, they should be doing this on a continual basis.So my understanding wasn't wrong after all then!!! I thought there might be some hidden feature of shortselling that could bring markets down. It's been blamed for so much lately.
It doesn't - you take a bet that 'fundamental' factors will cause it to drop in price. The idea that short-sellers can affect the price of an asset simply by taking a bet is a myth. If that was the case, the favourite would always win.
A good example of how short selling is not a cause but an effect (of a currency being overvalued). If the devaluation was an unjustified capitulation to short specs the specs would simply have changed tack and gone long forcing a revaluation etc. etc. No more were short sellers the reason for sterling's woe then than they are now.It was the short selling of sterling in 1992 that ultimately forced the Bank of England to withdraw the currency from the ERM and devalue it.
No more were short sellers the reason for sterling's woe then than they are now.
Wasn't the fact that the British were trying to maintain an overvalued pound sterling in 1992 the real problem though? Soros was able to sell so much sterling at such a good price because the Bank of England was buying it off him. If the BoE hadn't tried to prop the price up the real exchange rate for sterling would have been found a lot quicker and shorting would no longer have been an option for Soros et al.Totally disagree with this. The price of a currency ie the exchange rate, is ultimately determined by demand and supply. Selling GBP in 1992 for deutschemarks as Soros ($10 bn worth ) and other speculators did pushed it's price down towards it's permissible limit in the ERM. Because there was so much selling pressure on GBP attempts by the UK authorities to raise the value of GBP through higher interest rates and buying GBP using reserves wasn't going to work - hence the decision to leave the ERM and devalue the GBP.
Wasn't the fact that the British were trying to maintain an overvalued pound sterling in 1992 the real problem though? Soros was able to sell so much sterling at such a good price because the Bank of England was buying it off him. If the BoE hadn't tried to prop the price up the real exchange rate for sterling would have been found a lot quicker and shorting would no longer have been an option for Soros et al.
Either way you look at it I think shorters are only able to win if there is an overvaluation in the first place. Do you disagree? .
Exactly. Soros said himself and his colleagues started laughing when the British Chancellor came out during the day and said he was going to borrow £15 billion to buy the pound as that was exactly how much Soros was willing to sell! Soros took advantage of the whole ERM situation. He could short all he likes today and he wouldn't manage to bring down the pound so its not fair to say it was short selling that caused it.
I agree with Sunny and Afuera, I think demoivre is confusing cause and effect. The following is the causal flow:
Currency is overvalued (why? trade relationships ultimately)
causes
Shorters/sellers to outnumber buyers
causes
Currency to fall
Under ERM the King Canutes tried to block the second causal flow by being unreasoned buyers.
We see that the shorters/sellers are merely the transmission mechanism, they are not the primary engine of currency relationships.
Fair enough, but if short-sellers temporarily depress the value of an asset below it's 'fair' value then they will get burned when it is bought up on the other side of the dip. If you believe in efficient market theory, then an undervalued asset will always find a buyer and the price will return to value. So short-sellers would be toasted if they tried to depress the price of an asset that wasn't fundamentally over-valued.I'm not confused about this at all - all I have said is that selling causes price declines ( obviously more selling pressure than buying pressure ). An asset being overvalued doesn't , de facto , mean that it will be sold off and price will fall. Selling has to take place to bring the price down - it's economics 101.
As I say, it's what comes first? Yog has explained Economics 100 which reads as follows "if an asset is over-valued in a free and knowledgable market, sellers will outnumber buyers and vice versa."Selling has to take place to bring the price down - it's economics 101.
As I say, it's what comes first? Yog has explained Economics 100 which reads as follows "if an asset is over-valued in a free and knowledgable market, sellers will outnumber buyers and vice versa."
The currency markets are incredibly deep and I suggest knowledgable. Can you cite any situation where shorters, acting in consort, have forced a devaluation which was not warranted by the fundamentals?
As I have said on many occasions since 1999 we are in the wrong currency folks, and it's getting wronger by the day.
This is the problem, it is not our currency, its value vis a vis other currencies has negligible regard to our economy. As Davy stockbrokers say on their website - "the Central Bank would love to slash interest rates, print money and devalue the currency, but they can't".Why? Our currency is bouyant, sterling is sinking.
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