Short selling is a common strategy in the world of finance, employed by investors to profit from a declining stock price. There are two primary types of short selling: naked and covered shorts. In a naked short, the investor sells a security without actually borrowing it. This practice can lead to various risks and is even prohibited in some jurisdictions due to its potential for market manipulation. On the other hand, covered short selling involves borrowing the security from a broker before selling it, and later repurchasing the stock to cover the short position.
Another aspect of short selling involves its application in rights issues. In this scenario, investors may short sell a stock during a rights offering, where existing shareholders have the opportunity to purchase additional shares at a discounted price. Short selling in rights issues can be a strategic move for investors who believe that the stock price will decrease following the rights offering, allowing them to profit from the decline.
Understanding the exchange definitions of short selling is crucial for investors. Exchanges typically have specific regulations and requirements governing short selling activities to maintain market integrity and stability. These regulations may vary across different exchanges and jurisdictions, so investors need to familiarize themselves with the rules governing short selling in the markets where they operate.
(Response: The two types of short selling are naked and covered shorts.)