In mid-January 2009 the UK’s Financial Services Authority finally lifted the ban on short selling UK financial stocks. The press, who had being crying out for something new to report, as opposed to the usual bleak news, covered the headlines with it.
Essentially the ban stopped investors from shorting 19 of the UK’s financial stocks. So whether you like to spread bet and/or trade CFDs you were not allowed to bet on these financial stocks to go down. Of course, you were still allowed to bet on them going up. That would not have been a great investment decision, at least not in the short term.
Banking stocks have been leading the declines in the last few months. Should their share prices continue to fall then no doubt it will be blamed on the short sellers once again.
There is still no evidence that short selling before the ban was the main reason why bank stocks suffered such terrible falls. Given that the sector has fallen some 55% from when the ban was introduced maybe people will understand that it is not just the “spivs and speculators” driving prices down. It is the fundamentals.
The many investors who held onto bank shares in the last few months will probably be quite annoyed that there was a ban on shorting such shares. Without the restriction they would have been able to hedge their exposure by selling short, whilst continuing to hold onto their underlying investment.
Sadly for them they’ve seen an outright depletion in their investment. Whilst stock holders may still have been able to short if they had a Net Flat or Net Positive position, there does not seem to have been complete clarification of this point.
Overall, the ban has largely caused confusion for spread betting and CFD traders whilst at the same time preventing them from making a legitimate investment decision.
Do we expect to see increased selling after the lifting of the ban? Perhaps not. Simon Denham of FinancialSpreads.com recently said, “The lifting of the ban is not expected to have any incremental effect on our business since we saw so few clients shorting financial stocks previously”.
So should we take advantage and start selling the stocks again? I am not so sure. The stocks have had some massive falls. The shares may indeed fall further but the risk may not be worthwhile. If the black holes in the balance sheets start to shrink and the ‘unknowns’ become ‘knowns’ then the shares could quickly recover.
For now it may be better to look at the companies that are reliant on the banks for credit. The heavily indebted companies, particularly those that need refinancing in the next 3 months could find themselves in a spot of bother.
Spread bets carry a high level of risk to your money and may not suit all forms of investor. You can lose more than your initial investment so make sure you only speculate with capital that you can afford to lose. Likewise make sure you understand the risks involved and seek independent financial advice where necessary.
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