Finance

The implication of a ban on short selling of securities on future market
Short selling of securities involves selling of borrowed securities usually from a broker or third party while intending later to buy identical securities so as to return to the lender. The seller aim at making profit owing to a decline in prices between sale and repurchase transactions. In other words the buyer pays less in buying assets (security) than heshe receives by selling the securities. Incase prices increases, the seller incur losses. The seller is also likely to be charged a fee for borrowing the assets. Heshe may also be required to pay any dividend accruing from the borrowed asset (Fabozzi 2004 Tauli 2004).

Part of income gained from changes in price accrues to the owner of shares. In a case where this practice is banned investors will not receive such income. This will also reduce their participation in the stock market as this was their main activity in the capital market. Speculators who earn a living from short selling of securities will no longer be earning this income and the consequent is that this may reduce employment opportunities.

Short selling of securities contributes to market volatility which is undesirable to the investors. The ban on this practice is expected to reduce factors that lead to undesirable market conditions. This will ensure stable prices for such securities. Most of borrowed securities are owned by various institutions. In their effort to earn more earnings on their investments they offer their shares for lending. In case price increases, the borrower is likely to be unable to buy identical shares so as to return to the lender. In such a case, the financial position of the lender is threatened. Ban on short selling of securities will ensure such occurrence which may lead to fall of stock brokers and stock market at large do not occur. This also curbs fall of institutions (lender) listed in the stock market.

Participators in short selling of securities are speculators who provide liquidity and depth of future markets and improvement of the markets efficiency. In their attempt to make profit they exposed themselves to risks. A ban in this practice will benefit the future market participants. It will reduce the risk taking activities in the market which may be interrupted as fall in returns to many stock market participants borrowing from the risk and return relationship.

Short selling activities make the price of shares more volatile and difficult to predict. The volatility of capital market keeps off many investors from buying shares in fear of capital losses. Volatile capital market also threatens the ability of any firm listed in the stock market to raise finances through selling of its share. A ban will ensure a stable share prices which will create investors confidence. Similarly, investors will be able to make informed uninterrupted decision about prices of various shares. A ban on short selling is likely to reduce

In conclusion, a ban on short selling of securities has a number of effects for future market. It affects the volatility of share prices in a positive way i.e. make the share prices stable, it also reduces participation from the speculators (borrowers) and finally reduces cases that may lead to fall of stock market. This in one way or another will be beneficial for future market participators.