What is a short position?

What is a short position?

As the credit crunch bites and stock markets slump, "short sellers" are being blamed for driving share prices down. Shorting is nothing new. But it is becoming increasingly controversial in the market downturn. While stock-market punters normally buy shares in the hope the price will go up, taking a "short position" means betting on the price going down.

The process is simple. A trader borrows shares from a big City investor who charges a fee for the service. The trader then sells the shares in the hope of buying them back more cheaply when the price falls and returning them to their rightful owner. The difference between the two prices is the profit.

Shorters have been blamed for forcing down the market value of banking group HBOS. In March, when its share price dropped a shocking 17% in the space of a couple of minutes' trading, the finger was pointed at them.

Shorting is not against the rules, but trading after making up rumours in order to drive the price lower is. So the City regulator, the Financial Services Authority (FSA), stepped in and started a hunt for traders who might have taken out short positions on the back of false rumours. The FSA looked at mobile phone records and email exchanges, but failed to pin the blame on anyone.

Its next move was to demand that traders who went short when a company was conducting an emergency cash call should be forced to reveal their identities.

Ending the anonymity of shorters again failed.....continued below

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to stop the HBOS slide, but it was this new rule that forced investment bank Morgan Stanley to admit on Monday that it was "short" of 2.4% of HBOS - worth around £350m. Nothing new, perhaps, and legitimate, but for many unpalatable.

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