Commerce | Short (Finance) | Speculation

The public float or simply the "float" of a public company is the number of outstanding shares in the hands of public

investors as opposed to company officers, directors, or controlling-interest investors.[1] These are the shares that are available for trading. The float is calculated by subtracting restricted shares from outstanding shares. For example, a company may have ten million outstanding shares, but only seven million are trading on the stock market. Therefore, this company's float would be seven million. Stocks with smaller floats tend to be more volatile than those with larger floats. [2]. Large holdings of founding shareholders, corporate cross-holdings and holdings of the Government in partially privatized companies are usually excluded while computing the public float. On a stock exchange, a reverse stock split or reverse split is a process by a company of issuing to each shareholder in that company a smaller number of new shares in proportion to that shareholder's original shareholding which is cancelled. It is the opposite of a stock split, i.e. it is a stock merge — a reduction in the number of issued shares and an accompanying increase in the share price.[1] New shares are typically issued in a simple ratio, e.g. 1 new share for 2 old shares, 3 for 4, etc. There is a stigma attached to doing a reverse stock split, so it is not initiated without very good reason. Many institutional investors and mutual funds, for example, have rules against purchasing a stock whose price is below some minimum, perhaps US$5. In an extreme case, a company whose share price has dropped so low that it is in danger of being delisted from its stock exchange, might use a reverse stock split to increase its share price. A reverse stock split is often an indication that a company is in financial trouble.[2] It is also possible that a reverse stock split be used as a tactic to reduce the number of shareholders.[3] In a hypothetical 1-for-100 reverse split any investor holding less than 100 shares would simply receive a cash payment and no shares of stock. If the resulting number of shareholders has then dropped below some threshold, it may be placed into a

different regulatory category; such as an S corporation which is required by law to have fewer than 100 shareholders. Typically, the stock will temporarily add a "D" to the end of its ticker during a reverse stock split. In finance, short selling (also known as shorting or going short) is the practice of selling assets, usually securities, that have been borrowed from a third party (usually a broker) with the intention of buying identical assets back at a later date to return to the lender. It is a form of reverse trading. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as the seller will pay less to buy the assets than the seller received on selling them. Conversely, the short seller will incur a loss if the price of the assets rises. Other costs of shorting may include a fee for borrowing the assets and payment of any dividends paid on the borrowed assets. "Shorting" and "going short" also refer to entering into any derivative or other contract under which the investor profits from a fall in the value of an asset. Going short can be contrasted with the more conventional practice of "going long", whereby an investor profits from any increase in the price of the asset. Contents [hide]

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1 Concept o 1.1 Worked examples  1.1.1 Profitable trade  1.1.2 Loss-making trade o 1.2 Comparison with long positions 2 History o 2.1 Short selling restrictions in 2008 3 Mechanism o 3.1 Shorting stock in the U.S. o 3.2 Securities lending

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3.3 Sources of short interest data o 3.4 Short selling terms  3.4.1 Major lenders o 3.5 Naked short selling 4 Fees 5 Dividends and voting rights 6 Markets o 6.1 Futures and options contracts o 6.2 Currency 7 Risk 8 Strategies o 8.1 Hedging o 8.2 Arbitrage o 8.3 Against the box 9 The regulatory response 10 Views of short selling 11 See also 12 References
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13 External links and sources

[edit] Concept Finance Financial markets[show] Corporate finance[show] Personal finance[show] Public finance[show] Banks and banking[show] Financial regulation[show] Standards[show] Economic history[show] To profit from a decrease in the price of a security, a short seller can borrow the security and sell it expecting that it will be cheaper to

repurchase in the future. When the seller decides that the time is right (or when the lender recalls the securities), the seller buys equivalent securities and returns them to the lender. The process relies on the fact that the securities (or the other assets being sold short) are fungible; the term "borrowing" is therefore used in the sense of borrowing $10, where a different $10 note can be returned to the lender (as opposed to borrowing a car, where the same car must be returned). A short seller typically borrows through a broker, who is usually holding the securities for another investor who owns the securities; the broker itself seldom purchases the securities to lend to the short seller.[1] The lender does not lose the right to sell the securities while they have been lent, as the broker will usually hold a large pool of such securities for a number of investors which, as such securities are fungible, can instead be transferred to any buyer. In most market conditions there is a ready supply of securities to be borrowed, held by pension funds, mutual funds and other investors. The act of buying back the securities that were sold short is called "covering the short" or "covering the position". A short position can be covered at any time before the securities are due to be returned. Once the position is covered, the short seller will not be affected by any subsequent rises or falls in the price of the securities, as he already holds the securities required to repay the lender. The terms shorting and going short are also used as blanket terms for tactics that allow an investor to gain from the decline in price of a security. Such tactics are generally based on a derivative contract, such as an option, a future or a similar synthetic position. For example, a put option consists of the right to sell an asset at a given strike price; the owner of the option therefore benefits when the market price of the asset falls below that price, as he can buy the asset at the lower price and sell it under the option at the strike price. Similarly, a short position in a futures contract means the holder of the position has an obligation to sell the underlying asset later at a given price; if the price falls below the given price, the person with the short position can buy the asset at the lower price and sell it under the future at the higher price.

A short seller takes a negative. Subsequently.[edit] Worked examples [edit] Profitable trade Shares in C & Company currently trade at $10 per share. 1. 1. Subsequently the price of the shares rises to $25. 2. 5.000. [edit] Comparison with long positions Short selling is the opposite of "going long". the price of the shares falls to $8 per share. 3. [edit] Loss-making trade Shares in C & Company currently trade at $10 per share.000. believing that the price of a security will . Short seller now buys 100 shares of C & Company for $800. 4. Short seller is required to return the shares and to meet the obligation. Short seller incurs as a loss the $1. Short seller retains as profit the $200 difference (minus borrowing fees) between the price at which he sold the shares he borrowed and the lower price at which he was able to purchase the shares he returned. stance.500 difference between the price at which he sold the shares he borrowed and the higher price at which he had to purchase the shares he returned (plus borrowing fees). who accepts the return of the same number of shares as was lent. is compelled to buy 100 shares of C & Company for $2. Short seller returns the shares to the lender. 2. A short seller borrows 100 shares of C & Company and immediately sells them for a total of $1. A short seller borrows 100 shares of C & Company and immediately sells them for a total of $1. 4. 5. 3.500. despite the fact that the market value of the shares has decreased. Short seller return the shares to the lender who accepts the return of the same number of shares as was lent. or "bearish".

just as traditional long investors attempt to profit on securities which are undervalued by buying them. precipitating a major banking crisis which included the collapse of almost every private bank in Scotland. The notables spoke of an outrageous act and this led to the first real stock exchange regulations: a ban on short selling. By 1609. James. In another well- . and apparently using customer deposits to cover losses. In practice. In particular. but the loss (rather than the profit) is theoretically unlimited. the VOC still was not paying dividend.[3] The London banking house of Neal. Because a short position is the opposite of a long position.000 guilders in the VOC. and a liquidity crisis in the two major banking centres of the world. a big shareholder of the Vereenigde Oostindische Compagnie (VOC). The ban was revoked a couple of years later.fall. which effectively places a limit on the amount that can be lost. Investors who employ short selling often use it to allow them to profit on trading in securities which they believe are overvalued. London and Amsterdam. he invested about 85. and Le Maire's ships on the Baltic routes were under constant threats of attack by English ships due to trading conflicts between the British and the VOC. as the price of a security rises the short seller will receive a margin call from the broker. Fordyce and Down collapsed in June 1772. many features of the position are reversed in comparison. [edit] History Some theories hold that the practice was invented in 1609 by Dutch trader Isaac Le Maire.[2] Short selling has been a target of ire since at least the eighteenth century when England banned it outright. Le Maire decided to sell his shares and sold even more than he had. the profit (rather than the loss) is limited to the value of the security. The bank had been speculating by shorting East India Company stock on a massive scale. demanding that the short seller either cover his short position (by purchasing the security) or provide additional cash in order to meet the margin requirement for the security. It was perceived as having a magnifying effect in the violent downturn in the Dutch tulip market in the seventeenth century. In 1602.

[citation needed] At such times. such as the Dot-com bubble. shortsellers typically hope to profit from a market correction.[7] Some typical examples of mass short-selling activity are during "bubbles". The term "short" was in use from at least the mid-nineteenth century. Jacob Little was known as The Great Bear of Wall Street who began shorting stocks in the United States in 1822. It is commonly understood that "short" is used because the short seller is in a deficit position with his brokerage house. this was known as the uptick rule.[citation needed] Negative news.[citation needed] A few years later. when he sold short more than $10 billion worth of pounds sterling. may also entice professional traders to sell the stock short. During the Dot-com bubble. such as litigation against a company. Short-sellers were forced to cover their positions at . George Soros became notorious for "breaking the Bank of England" on Black Wednesday of 1992.referenced example. Alfred Winslow Jones founded a fund (that was unregulated) that bought stocks while selling other stocks short. Food and Drug Administration (FDA) announcements approving a drug often cause the market to react irrationally due to media attention. in 1949. 34-55970). and the hedge fund was born. 2007 when it was removed by the SEC (SEC Release No. hence hedging some of the market risk.[6] President Herbert Hoover condemned short sellers and even J. Legislation introduced in 1940 banned mutual funds from short selling (this law was lifted in 1997).[4] Short sellers were blamed for the Wall Street Crash of 1929.[5] Regulations governing short selling were implemented in the United States in 1929 and in 1940.[citation needed] Political fallout from the 1929 crash led Congress to enact a law banning short sellers from selling shares during a downtick. Edgar Hoover said he would investigate short sellers for their role in prolonging the Depression. shorting a start-up company could backfire since it could be taken over at a price higher than the price at which speculators shorted. and this was in effect until July 3. short sellers use the opportunity to sell into the buying frenzy and wait for the exaggerated reaction to subside before covering their position.

S. Securities and Exchange Commission Chairman Christopher Cox said the decision to impose a three-week ban on short selling of financial company stocks was taken reluctantly. Paulson and Federal Reserve chairman Ben S.K. Bernanke. "While the actual effects of this temporary action will not be fully understood for many more months.[8] was seen as a contributing factor to undesirable market volatility.[11] Also on September 22. if not years.[9] At the same time the U. Securities and Exchange Commission (SEC) for 799 financial companies for three weeks in an effort to stabilize those companies.S.25% of a company's share capital. he explained that the SEC's Office of Economic Analysis was still evaluating data from the temporary ban. but that the view at the time. required investors to notify it of any short positions in financial institutions." Later he changed his mind and thought the ban unproductive.acquisition prices.[10] On September 22. if they exceed 0. including from Treasury Secretary Henry M. these financial institutions could fail as a result and there would be nothing left to save. exacerbated by naked short selling. was that "if we did not act and act at that instant. and it was subsequently prohibited by the U. "knowing what we know now. [edit] Short selling restrictions in 2008 In September 2008 short selling.[12] In an interview with the Washington Post in late December 2008. I believe on balance the Commission would not do it again. while in many cases the firm often overpaid for the start-up. and it also restricted naked shorting. the Spanish market regulator." he said. and that preliminary findings point to several unintended market consequences and side effects.[13] In a December 2008 interview with Reuters. Financial Services Authority (FSA) prohibited short selling for 32 financial companies. U. Australia enacted even more extensive measures with a total ban of short selling. CNMV.”[14] [edit] Mechanism Short selling stock consists of the following: .

Finally. he makes a profit. mainly firms and hedge funds. because he wants to sell them. When the broker completes this transaction automatically. The investor may close the position by buying back the shares (called covering). the investor first ensures that cash or equity is on deposit with his brokerage firm as collateral for the initial short margin requirement. brokers come from loans made by the leading custody banks and fund management companies (see list below). The borrower must buy shares on the market and return them to the lender (or he must borrow the shares from elsewhere). Generally. it is called a 'buy-in'. This is referred to as a "locate. the investor may return the shares to the lender or stay short indefinitely.” Brokers have a variety of means to borrow stocks in order to facilitate locates and make good delivery of the shorted security. the investor has 3 days (in the US) to borrow the shares. If the stock advanced. If required by law. Some short sellers. where the shorted shares are not borrowed or delivered.S.• The investor instructs the broker to sell the shares and the proceeds are credited to his broker's account at the firm upon which the firm can earn interest. participate in the practice of naked short selling. At any time. • • • • [edit] Shorting stock in the U. Institutions often lend out their shares in order to earn a little extra money on their investments. in order to sell stocks short. Upon completion of the sale.g. The vast majority of stocks borrowed by U. the lender may call for the return of his shares e. he takes a loss. In the U. the short seller does not earn interest on the short proceeds.S.S. the seller must arrange for a broker-dealer to confirm that it is able to make delivery of the shorted securities. These institutional loans are . If the price has dropped..

Brokers will go through the "locate" process outside their own firm to obtain borrowed shares from other brokers only for their large institutional customers. brokerage accounts are only allowed to lend shares from accounts for which customers have "debit balances". These can be useful tools to spot trends in stock price movements but in order to be reliable. investors must also ascertain the number of shares brought into existence by naked shorters. Brokerage firms can also borrow stocks from the accounts of their own customers. The interest that is kept by the lender is the compensation to the lender for the stock loan. the borrower puts up cash collateral. The cash collateral is then invested by the lender. Stock exchanges such as the NYSE or the NASDAQ typically report the "short interest" of a stock. In general. he has not relinquished his interest and some rights in that stock. meaning they have borrowed from the account. Alternatively. who often rebates part of the interest to the borrower. In an institutional stock loan. these can also be expressed as the short interest ratio.e. which gives the number of shares that have been legally sold short as a percent of the total float. Typical margin account agreements give brokerage firms the right to borrow customer shares without notifying the customer. . Investors are cautioned to remember that for every share that has been shorted (owned by a new owner).) Most brokers will allow retail customers to borrow shares to short a stock only if one of their own customers has purchased the stock on margin. i. the original owner) who also is part of the universe of owners of that stock.e. (These restrictions include that the broker must have the express permission of the customer and provide collateral or a letter of credit. Despite not having any voting rights. SEC Rule 15c3-3 imposes such severe restrictions on the lending of shares from cash accounts or excess margin (fully paid for) shares from margin accounts that most brokerage firms do not bother except in rare circumstances.usually arranged by the custodian who holds the securities for the institution. which is the number of shares legally sold short as a multiple of the average daily volume. a 'shadow owner' exists (i. typically 102% of the value of the stock.

Hong Kong. often lend out these securities to gain extra income. short or bear ETFs). [edit] Sources of short interest data Time delayed short interest data (for legally shorted shares) is available in a number of countries. such as a custodian or investment management firm. and Spain.[edit] Securities lending Main article: Securities lending When a security is sold.[17] [edit] Short selling terms Days to Cover (DTC) is a numerical term that describes the relationship between the amount of shares in a given equity that have .g. and then publishes a compilation eight days later. and the seller may be subject to a claim from its counterparty. The amount of stocks being shorted on a global basis has increased in recent years for various structural reasons (e.[15] Some market data providers (like Data Explorers and SunGard Financial Systems[16]) believe that stock lending data provides a good proxy for short interest levels (excluding any naked short interest). retail investors can sometimes make an extra fee when their broker wants to borrow their securities. Certain large holders of securities. The lender receives a fee for this service. The data is typically delayed. the growth of 130/30 type strategies. the seller will "fail to deliver. Similarly. Otherwise. the seller is contractually obligated to deliver it to the buyer. If a seller sells a security short without owning it first. so it cannot be used as collateral for margin buying. the UK. a process known as securities lending. the seller needs to borrow the security from a third party to fulfill its obligation. SunGard provides daily data on short interest by tracking the proxy variables based on borrowing and lending data which it collects. including the US. for example. This is only possible when the investor has full title of the security." the transaction will not settle. the NASDAQ requires its broker-dealer member firms to report data on the 15th of each month.

"fails" data must be accessed to assess accurately the true level of short interest. if there are ten million shares of XYZ Inc. it would require ten days of trading for all legal short positions to be covered (10 million / 1 million). Short Interest is a numerical term that relates the number of shares in a given equity that have been legally shorted divided by the total shares outstanding for the company. and the total number of shares issued by the company is one hundred million. The short-seller's promise is known as a hypothecated share. now defunct) Citibank (New York) Bank of New York Mellon Corporation (New York) UBS AG (Zurich. . [edit] Major lenders • • • • • • • • Merrill Lynch (New Jersey) State Street Corporation (Boston) JP Morgan Chase (New York) Northern Trust (Chicago) Fortis (Amsterdam. shares are being created through naked short selling.been legally short sold and the number of days of typical trading that it would require to 'cover' all legal short positions outstanding. rather than buying the share itself. if there are ten million shares of XYZ Inc. Switzerland) [edit] Naked short selling Main article: Naked short selling A naked short sale occurs when a security is sold short without borrowing the security within a set time. For example. that are currently legally short sold and the average daily volume of XYZ shares traded each day is one million. usually expressed as a percent. the Short Interest is 10% (10 million / 100 million). For example. If however. This means that the buyer of such a short is buying the short-seller's promise to deliver a share. that are currently legally short sold. 3 days (T+3) in the US.

the client is charged a fee for this service. When a security's ex-dividend date passes.When the holder of the underlying stock receives a dividend. Requirements that are more stringent were put in place in September 2008. [edit] Fees When a broker facilitates the delivery of a client's short sale. It is detected by the Depository Trust & Clearing Corporation (in the US) as a "failure to deliver" or simply "fail. If the short position begins to move against the holder of the short position (i. money will be removed from the holder's cash balance and moved to his or her margin balance. arranging to borrow a security before a short sale is called a locate. the holder of the hypothecated share would receive an equal dividend from the short seller. . The rules were made permanent in 2009. the dividend is deducted from the shortholder's account and paid to the person from whom the stock was borrowed. the price of the security begins to rise). the holder will begin to borrow on margin for this purpose. Securities and Exchange Commission (SEC) put in place Regulation SHO. and the holder does not have sufficient funds in the cash account to cover the position. the U. Naked shorting has been made illegal except where allowed under limited circumstances by market makers.. ostensibly to prevent the practice from exacerbating market declines.e. In 2005.S. If short shares continue to rise in price.” While many fails are settled in a short time. to prevent widespread failure to deliver securities. some have been allowed to linger in the system. usually a standard commission similar to that of purchasing a similar security. In the US. thereby accruing margin interest charges. intended to prevent investors from selling some stocks short before doing a locate. Some[who?] have defended the practice of naked short selling against these restrictions. These are computed and charged just as for any other margin debit.

The short seller is therefore said to be "short the dividend". although the holder of the short position may alternately buy back the contract prior to expiration instead of making delivery. the question arises as to who receives the dividend. who is the "holder of record" and holds the shares outright. also expects to receive a dividend. Short futures . The short seller will therefore pay to the lender an amount equal to the dividend in order to compensate. The new buyer of the shares. Unlike a dividend. victims of Naked Shorting attacks sometimes report that the number of votes cast is greater than the number of shares issued by the company.For some brokers. as the holder of record. will receive the dividend from the company. The owner of a margin account from which the shares were lent will have agreed in advance to relinquish voting rights to shares during the period of any short sale. However. [edit] Dividends and voting rights Where shares have been shorted and the company which issues the shares distributes a dividend. These brokers may not pass this benefit on to the retail client unless the client is very large. This means an individual short-selling $1000 of stock will lose the interest to be earned on the $1000 cash balance in his or her account. voting rights cannot legally be synthesized and so the buyer of the shorted share.[19] [edit] Markets [edit] Futures and options contracts When trading futures contracts. who may hold its shares in a margin account with a prime broker and is unlikely to be aware that these particular shares are being lent out for shorting. the lender. controls the voting rights. the short seller may not earn interest on the proceeds of the short sale or use it to reduce outstanding margin debt. though as this payment does not come from the company it is not technically a dividend as such.[18] As noted earlier. A similar issue comes up with the voting rights attached to the shorted shares. being 'short' means having the legal obligation to deliver something at the expiration of the contract.

An example of this is as follows: Let us say a trader wants to trade with the US dollar and the Indian rupee currencies. the reverse can also occur. the trader buys the first currency again.e.100. When the exchange rate has changed.2 profit (minus fees). With this. selling short on the currency markets is identical to going long on stocks. the conversion rate becomes USD $1 to Rs. If the next day. obliging the counterparty to buy the underlying asset at the agreed upon (or "strike") price. Shorting futures may also be used for speculative trades.100 and keeps the Rs. the option holder may exercise these put options. Of course. each currency being priced in terms of another. In this way. this time he gets more of it. Since he got more money than he had borrowed initially. then the trader sells his USD $2 and gets Rs. He returns Rs. Shorting a futures contract is sometimes also used by those holding the underlying asset (i.transactions are often used by producers of a commodity to fix the future price of goods they have not yet produced. An investor can also purchase a put option. Assume that the current market rate is USD $1 to Rs. and pays back the loan.51. those with a long position) as a temporary hedge against price declines. in which case the investor is looking to profit from any decline in the price of the futures contract prior to expiration. he makes money. which would then be higher than the current quoted spot price of the asset. Currencies are traded in pairs. Novice traders or stock traders can be confused by the failure to recognize and understand this point: a contract is always long in terms of one medium and short another. . In the event of a market decline. [edit] Currency Selling short on the currency markets is different from selling short on the stock markets. giving that investor the right (but not the obligation) to sell the underlying asset (such as shares of stock) at a fixed price.50 and the trader borrows Rs. he buys USD $2.102.

the stockbroker may decide to cover the short seller's position immediately and without his consent. Many short sellers place a "stop order" with their stockbroker after selling a stock short. and the seller can lose more than the original value of the share. The risk of large potential losses through short selling inspired financier Daniel Drew to warn: "He who sells what isn't his'n. if the stock's price skyrockets. [edit] Risk This article needs additional citations for verification. Unsourced material may be challenged and removed. short selling is usually used as part of a hedge rather than as an investment in its own right. It is important to note that buying shares (called "going long") has a very different risk profile from selling short. (April 2009) Note: this section does not apply to currency markets. In the former case.One may also take a short position in a currency using futures or options. no upper limit. In short selling. this is reversed. on how high the price can go). This is an order to the brokerage to cover the position if the price of the stock should rise to a certain level. losses are limited (the price can only go down to zero) but gains are unlimited (there is no limit. in order to guarantee that the short seller will be able to make good on his debt of shares. In some cases. meaning the possible gains are limited (the stock can only go down to a price of zero). which is more directly analogous to selling a stock short. For this reason. the preceding method is used to bet on the spot price. Please help improve this article by adding reliable references. in theory. Must buy it back or go to pris'n" . in theory. with. in order to limit the loss and avoid the problem of unlimited liability described above.

Another disadvantage is that if a stock becomes "hard to borrow". so there is a credit risk . for any day the SEC declares a share is hard to borrow. most short sellers restrict their activities to heavily traded stocks. if the person who lent the stock wishes to sell and take a profit. Short sellers must be aware of the potential for a short squeeze. but not covered. At that point. Additionally. a broker will charge a hard to borrow fee daily. When the price of a stock rises significantly. with the intent of selling the position at a profit to the short sellers who will be panicked by the initial uptick or who are forced to cover their short positions in order to avoid margin calls. a broker may be required to cover a short seller's position at any time ("buy in"). subject to the terms under which they borrowed the stock. Short interest is defined as the total number of shares that have been legally sold short. they will need money to buy them. A short squeeze can be deliberately induced. some people who are shorting the stock will cover their positions to limit their losses (this may occur in an automated way if the short sellers had stop-loss orders in place with their brokers). Since covering their positions involves buying shares. which will then lead to the buy-in.[20] Short sellers have to deliver the securities to their broker eventually. which is defined by the SEC and based on lack of availability. One's return is strictly from capital gains. which in turn may trigger additional covering. and buy many shares. The short seller receives a warning from the broker that they are "failing to deliver" stock. others may be forced to close their position to meet a margin call. This can happen when large investors (such as companies or wealthy individuals) notice significant short positions.Short selling is sometimes referred to as a "negative income investment strategy" because there is no potential for dividend income or interest income. the short squeeze causes an ever further rise in the stock's price. and they keep an eye on the "short interest" levels of their short investments. others may be forced to cover. Because of this. This occurs without any notification to short sellers.

an options trader may short shares in order to remain delta neutral so that he is not exposed to risk from price movements in the stocks that underlie his options [edit] Arbitrage Further information: Arbitrage A short seller may be trying to benefit from market inefficiencies arising from the mispricing of certain products. Examples of this are: • • • A farmer who has just planted his wheat wants to lock in the price at which he can sell after the harvest. This can create substantial bond positions. The largest risk is that interest rates overall move.for the broker. A market maker in corporate bonds is constantly trading bonds when clients want to buy or sell. The trader can hedge this risk by selling government bonds short against his long positions in corporate bonds. short sellers are said to provide price support by buying when negative sentiment is exacerbated after a significant price decline. the short seller has to keep a margin with the broker. He would take a short position in wheat futures. Likewise. Examples of this are . In this way. the risk that remains is credit risk of the corporate bonds. Short selling can have negative implications if it causes a premature or unjustified share price collapse when the fear of cancellation due to bankruptcy becomes contagious. Short sellers tend to temper overvaluation by selling into exuberance. To reduce this.[21] [edit] Strategies [edit] Hedging Further information: Hedge (finance) Hedging often represents a means of minimizing the risk from a more complex set of transactions.

while delaying sale until the subsequent tax year. Unless certain conditions are met. and sells short the underlying US Treasury security. regardless of further fluctuations in the underlying share price. it serves to balance the long position taken earlier. without entering into any hedging strategies. [edit] Against the box One variant of selling short involves a long position. for a minimum of 60 days after the short position has been closed. initial public offerings (IPOs) cannot be sold short for a month after they start trading. Compliance with the regulation began on January 3. 2005. These conditions include a requirement that the short position be closed out within 30 days of the end of the year and that the investor must hold their long position. Regulation SHO was the SEC's first update to short selling restrictions since 1938.[22] [edit] The regulatory response In the US. This mechanism is in place to ensure a . investors considering entering into a "short against the box" transaction should be aware of the tax consequences of this transaction. The purpose of this technique is to lock in paper profits on the long position without having to sell that position (and possibly incur taxes if said position has appreciated). the IRS deems a "short against the box" position to be a "constructive sale" of the long position. The term box alludes to the days when a safe deposit box was used to store (long) shares. "Selling short against the box" consists of holding a long position on which the shares have already risen.• An arbitrageur who buys long futures contracts on a US Treasury security. Thus. For example. one can ensure a profit in this way. U. the profit is locked in (less brokerage fees and short financing costs).S. which is a taxable event. Once the short position has been entered. from that point in time.[23] In the US. It established "locate" and "close-out" requirements for broker-dealers. in an effort to curb naked short selling. whereupon one then enters a short sell order for an equal amount of shares.

effective from 2300 GMT. [29] and France. countries in Europe were considering to remove the ban. In the US. Canada and other countries do allow selling IPOs (including U. Chinese regulators have responded by allowing short selling. with stock prices moving in the same way as they would have moved anyhow. while the ban in the US was already . IPOs) short. between 19 and 21 September 2008.[27] The ban on short selling was further extended for another 28 days on 21 October 2008. a similar response was made by the Securities and Exchange Commission with a ban on short selling on 799 financial stocks from 19 September 2008 until 2 October 2008. House of Commons. Some state governors have been urging state pension bodies to refrain from lending stock for shorting purposes. 19 September 2008 until 16 January 2009.S.degree of price stability during a company's initial trading period. John McFall. chairman of the Treasury Select Committee. but the ban reduced volume and liquidity. some brokerages that specialize in penny stocks (referred to colloquially as bucket shops) have used the lack of short selling during this month to pump and dump thinly traded IPOs.[24] After the ban was lifted. Australia temporarily banned short selling. along with a package of other market reforms. Ireland. were also introduced. Greater penalties for naked shorting. In the UK.[26] and later placed an indefinite ban on naked short selling.[28]Germany.[31] An assessment of the effect of a ban on short-selling that was enacted in many countries in the fall of 2008 showed that it had only "little impact" on the movements of stocks. made clear in public statements and a letter to the FSA that he believed it ought to be extended. the Netherlands and Belgium banned naked short selling leading financial stocks. Switzerland and Canada banned short selling leading financial stocks. by mandating delivery of stocks at clearing time.[30] By contrast. However.[32] By December. the Financial Services Authority had a moratorium on short selling 29 leading financial stocks.[25] Soon thereafter.

[37] Chanos responds to critics of short-selling by pointing to the critical role they played in identifying problems at Enron.lifted in October 2008.[39] but books like Don't Blame the Shorts by Robert Sloan and Fubarnomics by Robert E. Asensio engaged in a lengthy legal battle with the pharmaceutical manufacturer Hemispherx Biopharma.[33] Financial researchers at Duke University said in a study that short interest is an indicator of poor future stock performance (the self fulfilling aspect) and that short sellers exploit market mistakes about firms' fundamentals. which may include the ex ante identification of asset bubbles.[40] Short seller Anthony Elgindy was subjected to regulatory sanctions before he was sentenced to prison in 2005 for racketeering conspiracy. [edit] Views of short selling This section requires expansion. Wright suggest that Cramer exaggerated the costs of short selling and underestimated the benefits. Boston Market and other "financial disasters" over the years. The SEC proposed new restrictions on short selling in April 2009.[38] Commentator Jim Cramer has expressed concern about short selling and started a petition calling for the reintroduction of the uptick rule.[35] while Buffett believes that short sellers are useful in uncovering fraudulent accounting and other problems at companies.[34] Such noted investors as Seth Klarman and Warren Buffett have said that short sellers help the market. Klarman argued that short sellers are a useful counterweight to the widespread bullishness on Wall Street.[36] Shortseller James Chanos received widespread publicity when he was an early critic of the accounting practices of Enron Corp. Individual short sellers have been subject to criticism and even litigation. . Short seller Manuel P. Advocates of short selling say that the practice is an 'essential' part of the price discovery mechanism.

wire fraud and extortion. For the village. see Speculator Mine disaster. His conviction and sentence was later upheld by an appeals court in New York. Financial market participants • • • • • • • Collective investment schemes Credit unions Insurance companies Investment banks Pension funds Prime brokers Trusts Finance series • • • • • Financial market Participants Corporate finance Personal finance Public finance . For the Montana mining incident. see Speculation (disambiguation).securities fraud. see Speculator. For other uses. New York.[ Speculator" redirects here. This article is about the financial term.

holding. buyers' changing perceptions of the worth of a stock security. bonds. Speculators may rely on an asset appreciating in price due to any of a number of factors that cannot be well enough understood by the speculator to make an investment-quality decision. speculation. to mean any act of placing money in a financial vehicle with the intent of producing returns over a period of time. "speculation. but speculation. by definition. and the many influences over the short-term movement of securities.[1] Speculation typically involves the lending of money or the purchase of assets. For instance. commodities. is." which is formally defined as above in Graham and Dodd's 1934 text. Short selling is also. the terms "speculation" and "investment" are actually quite specific. speculation.• • Banks and banking Financial regulation ation is a financial action that does not promise safety of the initial investment along with the return on the principal sum. collectibles. currencies. trading commodity futures contracts. promises safety of principal and a satisfactory return. upon thorough analysis. Some such factors are shifting consumer tastes. although the word "investment" is typically used. such as for oil and gold. Security Analysis. For instance. fluctuating economic conditions. . The term. by definition. contrasts with the term "investment. There are also some financial vehicles that are. selling. economic factors associated with market timing. most ventured money—including funds placed in the world's stock markets—is actually not investment. equity or debt but in a manner that has not been given thorough analysis or is deemed to have low margin of safety or a significant risk of the loss of the principal investment. in a general sense." which is a financial operation that. by definition. Financial speculation can involve the buying.[1] In a financial context. the factors associated with solely chartbased analysis. speculative. and short-selling of stocks.

or any valuable financial instrument to profit from fluctuations in its price. In architecture speculation is used to determine works that show a strong conceptual and strategic focus. irrespective of its underlying value.. speculation 2 The economic benefits of speculation o 2.some speculation is necessary and unavoidable. for in many common-stock situations.1 Sustainable consumption level o 2. there are substantial possibilities of both profit and loss.real estate.. According to Ben Graham in Intelligent Investor. however.. speculation Identifying speculation can be best done by distinguishing it from investment."[3] Many long-term investors. the prototypical defensive investor is "..[2] Contents [hide] • • • • • • • • 1 Investment vs. may be classified as speculators. excepting only the rare few who are primarily motivated by income or safety of principal and not eventually selling at a profit.one interested chiefly in safety plus freedom from bother.4 Finding environmental and other risks o 2." He admits.2 Market efficiency and liquidity o 2. and the risks therein must be assumed by someone.3 Bearing risks o 2.5 Shorting 3 Some side effects 4 Regulating speculation 5 Books 6 See also 7 References 8 External links [edit] Investment vs. . that ". derivatives. even those who buy and hold for decades.

Their purchases raise the price. On the other . and its distinction from the term Investment is one of degree of risk. in "The Speculator as Hero"[5] describes the benefits of speculation: Let's consider some of the principles that explain the causes of shortages and surpluses and the role of speculators. When a harvest is too small to satisfy consumption at its normal rate.[4] There is nothing in the act of speculating or investing that suggests holding times have anything to do with the difference in the degree of risk separating speculation from investing. The well known[says who?] speculator Victor Niederhoffer.[citation needed] [edit] The economic benefits of speculation [edit] Sustainable consumption level Speculation usually involves more risks than investment. Producers encouraged by the high price further lessen the shortage by growing or importing to reduce the shortage. speculators come in. thereby checking consumption so that the smaller supply will last longer. The term speculation implies that a business or investment risk can be analyzed and measured. which is based on random outcomes. It differs from gambling. hoping to profit from the scarcity by buying.Speculating is the assumption of risk in anticipation of gain but recognizing a higher than average possibility of loss.

speculators can actually increase production through their willingness to take on risk. This reduces prices. Another service provided by speculators to a market is that by risking their own capital in the hope of profit. then only producers (hog farmers) and consumers (butchers. the farmer can hedge the price risk and is now willing to plant the corn.side. including those who may be classified as hedgers and arbitrageurs. [edit] Bearing risks Speculators also sometimes perform a very important risk bearing role that is beneficial to society. . they add liquidity to the market and make it easier for others to offset risk. Any new entrant in the market who wants to either buy or sell pork bellies would be forced to accept an illiquid market and market prices that have a large bid-ask spread or might even find it difficult to find a co-party to buy or sell to. they sell. Thus.) would participate in that market. Alas. reduce the spread. when the price is higher than the speculators think the facts warrant. [edit] Market efficiency and liquidity If a certain market—for example. A speculator (e. By selling his crop in advance at a fixed price to a speculator. a pork dealer) may exploit the difference in the spread and. there would be a larger spread between the current bid and ask price of pork bellies. [edit] Finding environmental and other risks Hedge funds that do fundamental analysis "are far more likely than other investors to try to identify a firm’s off-balance-sheet exposures". With fewer players in the market. etc.g. For example. thus creating a more efficient market. a farmer might be considering planting corn on some unused farmland.. he might not want to do so because he is concerned that the price might fall too far by harvest time. in competition with other speculators. encouraging consumption and exports and helping to reduce the surplus. pork bellies—had no speculators.

The winner's curse is however not very significant to markets with high liquidity for both buyers and sellers.including "environmental or social liabilities present in a market or company but not explicitly accounted for in traditional numeric valuation or mainstream investor analysis". In 1936 John Maynard Keynes wrote: "Speculators may do no harm as bubbles on a steady stream of enterprise. but they may have their own perverse effects. he managed two investment funds.[citation needed] Speculation can also cause prices to deviate from their intrinsic value if speculators trade on misinformation. as the auction for selling the product and the auction for buying the product occur simultaneously. but also periodically included commodity . invested not only in the then 'emerging' market US stocks. This is known as an economic bubble. one of which. see winner's curse. in extreme cases this may lead to crashes. and the two prices are separated only by a relatively small spread. Such a period of increasing speculative purchasing is typically followed by one of speculative selling in which the price falls significantly. But the situation is serious when enterprise becomes the bubble on a whirlpool of speculation. (1936:159)"[7] Mr Keynes himself enjoyed speculation to the fullest. or if they are just plain wrong. [6] [edit] Some side effects Auctions are a method of squeezing out speculators from a transaction.[6] [edit] Shorting Shorting may act as a “canary in a coal mine” to stop unsustainable practices earlier and thus reduce damages and forming market bubbles. This creates a positive feedback loop in which prices rise dramatically above the underlying value or worth of the items. This mechanism prevents the winner's curse phenomenon from causing mispricing to any degree greater than the spread. called Chest Fund. and hence make the prices better reflect the true quality of operation of the firms. running an early precursor of a hedge fund. As the Bursar of the Cambridge University King's College.

averaging 13% p. His fund achieved positive returns in almost every year.e.a. In May 2008.e. invested not only in stocks but also commodities and currencies) as well as shorting. which Keynes advocated among the principles of successful investment in his 1933 report ("a balanced investment position [. [edit] Regulating speculation The Tobin tax is a tax intended to reduce short-term currency speculation. He chose modern speculation techniques practiced today by hedge funds.. albeit to a smaller extent (see Chua and Woodward. On the other hand. with overall return volatility approximately three times higher than the stock market index benchmark. 2009. "The American taxpayers bailed out Wall Street during a crisis brought on by . responsible for his spectacular investment performance..] and if possible. i. which included inter-market diversification (i.e. which are quite different from the simple buy-and-hold long-term investing. selling borrowed stocks or futures to make money on falling prices... blaming the 2008 oil price rises on manipulation by hedge funds.[10] On December 3.[9] It is a controversial point whether the presence of speculators increases or decreases the short-term volatility in a market.. ostensibly to stabilize foreign exchange. 80% of the maximum rationally justifiable levels (of the so called Kelly criterion). 1983) . crowd behavior and positive feedback loops in market participants may also increase volatility at times. i. thanks to very modern investment strategies. Such levels of volatility.") [8] According to Ziemba and Ziemba (2007). would be achievable today only through the most aggressive instruments (such as 3:1 leveraged exchange-traded funds). even during the Great Depression. opposed risks. US Congressman Peter DeFazio stated. Their provision of capital and information may help stabilize prices closer to their true values. German leaders planned to propose a worldwide ban on oil trading by speculators.futures and foreign currencies. Keynes risk-taking reached 'cowboy' proportions.

2010. President Barack Obama endorsed the Volcker Rule which deals with speculative investments of banks that don't benefit their customers. Most frequently associated with an Initial Public Offering (IPO).[12] See also: Speculative attack. 2. Fictitious capital. promotion expenses. which does not have complete particulars on the price of the securities offered and quantum of securities offered. Currency crisis. 6. and Spahn tax A red herring prospectus is a document submitted by a company (issuer) who intends on having a public offering of securities (either stocks or bonds) in the United States. Currency transaction tax. The red herring statement contains: 1. 4. 3. which does not have complete particulars on the price of the securities offered and quantum of securities offered. proposed offering price range. purpose of the issue. Financial transaction tax.reckless speculation in the financial markets. The Volcker Rule states that these investments played a key role in the financial crisis of 2007–2010. net proceeds to the issuing company (issuer). underwriter's commissions and discounts. ."[11] On January 21. 5. Tobin tax." He claimed a "financial transaction tax legislation will force Wall Street to do their part and put people displaced by that crisis back to work. this registration statement must be filed with the Securities and Exchange Commission(SEC). "Red-herring prospectus" means a prospectus. Black Wednesday. disclosure of any option agreement. Contents "Red-herring prospectus" Means a prospectus.

names and address of all officers. The SEC can deem the registration "deficient" in which case registration does not become effective until the deficiencies are corrected. 12. 10. The SEC does not approve the securities registered with it. does not pass on the investment merits. copies of the articles of incorporation of the issuer. the Securities Act of 1933 requires the preparation of a shorter document. 8. Information contained herein is subject to completion or amendment. Prospectus Since the registration statement is a very lengthy and complex document. earnings statements for last 3 years. called the "cooling-off period." This is the minimum number of days. known as a prospectus. a FINAL PROSPECTUS is prepared which includes the final public offering price. "A Registration Statement relating to these securities has been filed with the Securities and Exchange Commission but has not yet become effective. Upon the registration becoming effective.balance sheet. directors. [edit] Why it is called so? The term 'red herring' originates from the idiomatic use of that phrase. nor guarantee . 7. 9." [edit] Registration The minimum period between the filing of a Registration and its effective date is 20 days. 11. These securities may not be sold nor may offers to buy be accepted prior to the time the Registration Statement becomes effective. for investors to read. underwriters and stockholders owning 10% or more of the current outstanding stock. The reason it is called a red herring is due to a disclosure statement printed in red ink on the cover which explicitly states that the issuing company is not attempting to sell its shares. copy of the underwriting agreement.g. legal opinion on the issue. if available. e.

---------What's red herring prospectus? What is the difference between an offer document.the accuracy of the statements within the registration statement or prospectus. The draft offer documents are filed with SEBI. An RHP for and FPO can be filed with the RoC without the price band and the issuer. The Draft Offer document is available on the SEBI Web site for public comments for a period of 21 days from the filing of the Draft Offer Document with SEBI. The SEC merely attempts to make certain that all pertinent information is disclosed. SEBI may specify changes. at least 21 days prior to the filing of the Offer Document with the RoC/ SEs. if any. An offer document covers all the relevant information to help an investor to make his/her investment decision. in such a case will notify the floor price or a price band by way of an advertisement one day prior to the opening of the issue. On the other hand. the number of shares and the upper and lower price bands are disclosed. a prospectus and an abridged prospectus? What does it mean when someone says "draft offer doc"? "Offer document" means Prospectus in the case of a public issue or offer for sale and Letter of Offer in the case of a rights issue which is filed with Registrar of Companies (RoC) and Stock Exchanges. "Draft Offer document" means the offer document in draft stage. RHP. an issuer can state the issue size and the number of shares are determined later. "Red Herring Prospectus" is a prospectus which does not have details of either price or number of shares being offered or the amount of issue. This means that in case the price is not disclosed. it is a process . In the case of book-built issues. in the draft Offer Document and the issuer or the lead merchant banker shall carry out such changes in the draft offer document before filing the Offer Document with the RoC/ SEs.

an immediate relative of the promoter (i. any company in which a group of individuals or companies or combinations . if they are acting as such merely in their professional capacity are not be included in the definition of a promoter.e. SEBI Guidelines have stipulated lock-in requirements on shares of promoters mainly to ensure that the promoters or main persons who are controlling the company. What does one mean by `Lock-in'? "Lock-in" indicates a freeze on the shares. It accompanies the application form of public issues. How the word `Promoter' has been defined? The promoter has been defined as a person or persons who are in overall control of the company. brother. shall continue to hold some minimum percentage in the company after the public issue. or any parent. the details of the final price are included in the offer document. The offer document filed thereafter with ROC is called a prospectus. The requirements are detailed in Chapter IV of DIP guidelines. who are instrumental in the formulation of a plan or programme pursuant to which the securities are offered to the public and those named in the prospectus as promoters(s). In case promoter is a company. a subsidiary or holding company of that company. Hence.of price discovery and the price cannot be determined until the bidding process is completed. `Promoter Group' includes the promoter. any company in which the promoter holds 10 per cent or more of the equity capital or which holds 10 per cent or more of the equity capital of the promoter. "Abridged Prospectus" means contains all the salient features of a prospectus. It may be noted that a director / officer of the issuer company or person. Only on completion of the bidding process. such details are not shown in the Red Herring prospectus filed with the RoC in terms of the provisions of the Companies Act. spouse of that person. sister or child of the person or of the spouse).

including all of its assets. The total market capitalization of all publicly traded companies in the world was US$51. An entirely public corporation.5 trillion in May 2008[2] before dropping below US$50 trillion in August 2008 and slightly above US$40 trillion in September 2008. Likewise. may be freely bought and sold through purchases and sales of stock. and purchased by investors) of a publicly traded company. which will determine the price of the company's shares.2 trillion in January 2007[1] and rose as high as US$57. As owning stock represents ownership of the company. the capitalization of stock markets or economic regions may be compared to other economic indicators.[2] [edit] Valuation Main article: Business valuation Stock market capitalization in 2005 Market capitalization represents the public consensus on the value of a company's equity.thereof who holds 20 per cent or more of the equity capital in that company also holds 20 per cent or more of the equity capital of the issuer company. capitalization could represent the public opinion of a company's net worth and is a determining factor in stock valuation. Its market capitalization is the share price multiplied by the number of . “Placement Document” means document prepared by Merchant Banker for the purpose of Qualified Institutions placement and contains all the relevant and material disclosures to enable QIBs to make an informed decision. including all its equity. issued. Market capitalization/capitalisation (often market cap) is a measurement of size of a business enterprise (corporation) equal to the share price times the number of shares outstanding (shares that have been authorized.

which may be a government entity. The cutoffs may be defined as percentiles rather than in nominal dollars. mid-cap. the exact cutoff values.[3] Different numbers are used by different indexes. this pushes up market capitalization in what might be called an "artificial" manner. and overall market . market capitalization is one measure of "float" i. population change. Speculation can affect any asset class. Nikkei. share value times an equity aggregate.e. or another corporation. The definitions expressed in nominal dollars need to be adjusted over the decades due to inflation. such as gold or real estate. The terms mega-cap and micro-cap have also since come into common use. It is possible for stock markets to get caught up in an economic bubble. [edit] Categorization of companies by capitalization Traditionally. valuations rise disproportionately to what many people would consider the fundamental value of the assets in question. the market capitalization they use is the value of the publicly tradable part of the company. and small-cap. In such events. and nano-cap is sometimes heard. DAX. Note that market capitalization is a market estimate of a company's value. based on perceived future prospects. economic and monetary conditions. Stock prices can also be moved by speculation about changes in expectations about profits or about mergers and acquisitions. i.e..[3][4] there is no official definition of. Thus. a family. Market capitalization is therefore only a rough measure of the true size of a market. providing a total value for the company's shares and thus for the company as a whole. with free and public being others.shares in issue. In the case of stocks. like the steep rise in valuation of technology stocks in the late 1990s followed by the dot-com crash in 2000. and MSCI adjust for these by calculating on a free float basis. FTSE. Many stock market indices such as the S&P 500. Ibovespa. Many companies have a dominant shareholder. companies were divided into large-cap. or full consensus agreement about. Sensex.

Big/Large caps are companies have a market cap between 10-200 billion dollars. SmallCaps do present the possibility of greater capital appreciation. which includes debt and other factors. but it is not very large now). These might not be industry leaders but are well on their way to becoming one.valuation (for example. Small caps are typically new or relatively young companies and have a market cap between 100 million to 1 billion dollars. A more comprehensive measure is enterprise value (EV). Mid caps range from 2 billion to 10 billion dollars. $1 billion was a large market cap in 1950. and they may be different for different countries. A rule of thumb may look like: • • • • • • Mega-cap: Over $100 billion Large-cap: $10 billion–$100 billion Mid-cap: $1 billion–$10 billion Small-cap: $100 million–$1 billion Micro-cap: $10 million-$100 million Nano-cap: Below $10 million Cap is short for capitalisation which is a measure by which we can classify a company's size. Insurance firms use a value called the embedded value (EV). but at the cost of greater risk. [edit] See also • • • • • Financial ratio Free float List of finance topics List of corporations by market capitalization Market price . SmallCap's track record won't be as lengthy as that of the Mid to MegaCaps. [edit] Related measures Market cap reflects only the equity value of a company.

such as water and electricity. but that term is not in wide use. there is usually not an understanding of how a price cap is determined. there is a state level agency that is charged with the task of working with utility providers to determine a price cap for services rendered that is equitable to the consumer as well as to the supplier. In some instances. One excellent example of price cap regulation is in the rates that may be charged for household utilities.com/in NSE Stock Market Training Weekend classes. 3. ^ Global stock values top $50 trln: industry data (Reuters) ^ a b WFE Report Generator including report for Domestic Market Capitalization 2008 (World Federation of Exchanges) ^ a b According to Investopedia.in Often.ge. Ads by Google GE in India GE is a major employer in the India and invests in multiple sectors. people hear news reports that refer to price caps being imposed in a number of business settings.Manipaleducation.) ^ Definition of Market Capitalization Often. Register Now Nseprograms. Here is some background on the price cap. 2.• • • • Market trends Public float Shares authorized Treasury stock [edit] References 1. there are governmental organizations that determine price regulation. 4. (Investopedia also lists a definition for "nano-cap". and how the price cap impacts consumer purchasing power. how the cap is calculated. . www. While most people understand that a price cap has some impact on what they will pay for various goods and services. The price cap is simply a process for establishing rates or prices that will be charged for a particular good or service. Hands-on training by industry experts.

or why it should be allowed to stand. so players in the industry do retain the ability to distinguish themselves by both quality and price to the available consumer market. but does not allow for making an unreasonable amount of profit per consumer.Increases in rates have to meet with the approval of the state agency before the utility can implement any price changes that exceed the agreed upon price cap. the provider has to look for ways to keep the operation efficient. state agencies and public service commissions release detail that is available to the average citizen about what it costs a utility to deliver service. Second. revenue-cap regulation establishes a fair balance between profit making and covering operation expenses. This can make a price hike on the power bill a little easier to deal with. but will not create a situation that will price anyone out of business. but without increasing the price tag. There are a lot of advantages to implementing a price cap. Understanding how much of the average dollar per usage actually goes into providing the service can help people understand why the current price cap regulation needs to be revised. While no one likes to pay more for services. Because a price cap ensure the provider of making enough profit to continue delivering services. a price cap does allow for a degree of competitive pricing. As an example. Price Cap . At the same time. A number of innovations on the production of goods and services have come about because suppliers had to find new ways to deliver more goods to a larger audience. above and beyond making sure the general public can afford basic services and goods. the price cap often makes disclosure of associated costs available to anyone interested. an industry may choose to impose a price cap for manufactured goods that will meet the demand. First. In other settings. a price cap may be arrived by paying attention to the common economic indicators of supply and demand. the price cap helps to set reasonable expectations as to what the general public should pay for services rendered. Generally.

state agencies will agree with providers that an upward change in the price cap is needed. Businesses take on risk when starting a new venture. Ads by Google Cap Petite Enfance Wheel Cap Bottle Cap Cap Rates Ads by Google Gowns for every Ceremony Get your Premium Graduation.I agree with you. so are service providers.Buy Cap Formation Cap Value Cap Baseball Cap Prices Buy Price Italian Cap One of the key indicators used to arrive at or revise a price cap is the rate of inflation.Essar.com Discuss this Article 3 Latte31. it is important to remember that the alternative could easily be cutting back on service delivery in order to remain profitable. First Communion Gowns www. Often. While this may seem unfair to some consumers. so the vendors can continue to make enough profit to adequately provide services to consumers.com Essar Group WorldWide 60K+ Employees in Over 20 Countries $ 15 Billion Revenues. A realistic price cap helps to maintain a balance between what the consumer can afford to pay and what the providers needs to deliver the service and still realize a decent profit. Confirmation. Let's Begin! www. Sometimes the risk pays off in increased profits and sometimes . Just as individuals are impacted by inflation.rosetherese.

This is how the market determines appropriate pricing. successful businesses that are efficiently run are rewarded with profits. Government regulations state that the government must approve any price increase in services. The more profit the company has more taxes they generally pay and when a company is profitable it generally provides better goods and services. These profits should not be limited to what the government feels is appropriate. This is to ensure that the power company does not take an advantage its customers because they are the sole provider of the power source. .it does not. In a capitalist society. For example.Sunny27 2 Oasis11.latte31 1 Price caps generally are imposed on industries or companies that usually are main providers of vital goods and services. if the cost of something becomes too high. If enough of the demand drops eventually the price of the item will come down. Since . I think the market should determine what the price of something should be. This is far better than imposing a price cap. A classic example of this involves the utility companies because the utility company is the name service provider of power to consumers in a given area. I disagree that the government should be restricting a company's profits in other industries. consumers might choose not to purchase the item.While I agree that there should be a price cap regarding utility services. The government should not decide what something should cost. .

- .there are no other providers for electrical power the government imposes a price cap for services.

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