Private Investor: Short-selling small companies makes investors get mad

Bullying is wrong. It is banned at home and school, So why shouldn't small companies be protected on the stock market?

Bullying is wrong. It is banned at home and school, So why shouldn't small companies be protected on the stock market?

That was the tenor of the protests from a couple of guests at a party last weekend. Wow, were they angry! Two ladies, who had taken up investing to augment the household income and give them some amusement four or five years ago. But they were now finding the market a much rougher place.

A big kafuffle is going on following a mauling and several cases of recommended short selling of their stocks by some of the tipster websites. As it has been mainly in the Alternative Investment market (AIM) stocks, beloved of private investors, it has created more spleen than the mega raids launched by hedge funds.

What incensed these ladies was the way short sellers are pushing around small companies. They thought that some of this "shorting" (when the seller does not actually hold shares, but sells ahead of likely bad news with a view to purchasing back more cheaply) was not right. Especially not when doing this in combination of the power of websites. It had been going off in some of their companies, which were so small that there was unlikely to be enough trading for prices to recover easily.

The upshot is that investors like them are being put off, and raising capital to grow businesses is becoming impossible. "The market has changed dramatically in the last eight to 12 months, and not for the better," said one. The other added: "The shorters use Contracts for Difference (CFDs), spread-betting or covered warrants."

My ladies have consequently changed their investment style for small companies. From "buy to hold" they have switched to a more aggressive stance. It is a case of "if you can't beat them, join them". Shorting, arbitraging and short-term trading seem likely to be rife. Prospects for the market look restricted by the oil price increase, terrorist worries and rising interest rates. Hedge funds are growing and raising the speculative tone of the market.

Encouragement is also coming from stock lenders. Lacking corporate finance fees and share trading profits, insurance companies, pension funds and banks are filling the gaps in their income streams with fees from lending stock to speculators.

The giant fund manager Barclays Global Investors has built a cash management business out of the growing flow of cash collateral pledged by hedge fund stock borrowers.

But my friends have a point. Large companies can look after themselves. Bear raids can usually be countered with support from vested interests, such as brokers or shareholders. Recent cases include the hedge fund group Man, Abbey National, Cable & Wireless, Big Food Group, Lastminute.com, Carphone Warehouse and Regus.

But no one can be pleased when short speculators target small companies at early stages when they are still establishing themselves. Recent vulnerable hits have been on the biotech group Proteome Science, the pumps developer Pursuit Dynamics, HIT Entertainment, Transense Technologies and Pipewalk. It hardly helps AIM's international marketing campaign pitching it as the place for small companies.

Even market operators have been upset by shorting. May's enquiry into bear raids on Griffin Mining and others revealed the cause as short-sellers in Berlin. Around 150 companies were feared victims.

Back in London the Stock Exchange (LSE) seems to have made up its mind that shorting, and stock lending, are a good thing. The former controls overvaluations, and the latter helps liquidity and dealing prices.

That rationale is good as far as it goes. But it hardly holds up in cases that smack of the "hooligan behaviour" that angers investors. Shorting remains a contentious issue that bedevils private shareholders.

sally@sallywhite.fsbusiness.co.uk

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Experienced Recruitment Consultant

    £20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

    Recruitment Genius: Collections Agent

    £14000 - £16000 per annum: Recruitment Genius: This company was established in...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

    Day In a Page

    Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

    How Isis profits from destruction of antiquities

    Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
    Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

    'If we lose touch we’ll end up with two decades of the Tories'

    In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
    Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

    The Arab Spring reversed

    Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
    King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

    Academic claims King Arthur was real - and reveals where he lived

    Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
    Who is Oliver Bonas and how has he captured middle-class hearts?

    Who is Oliver Bonas?

    It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
    Earth has 'lost more than half its trees' since humans first started cutting them down

    Axe-wielding Man fells half the world’s trees – leaving us just 422 each

    However, the number of trees may be eight times higher than previously thought
    60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

    60 years of Scalextric

    Model cars are now stuffed with as much tech as real ones
    Theme parks continue to draw in thrill-seekers despite the risks - so why are we so addicted?

    Why are we addicted to theme parks?

    Now that Banksy has unveiled his own dystopian version, Christopher Beanland considers the ups and downs of our endless quest for amusement
    Tourism in Iran: The country will soon be opening up again after years of isolation

    Iran is opening up again to tourists

    After years of isolation, Iran is reopening its embassies abroad. Soon, there'll be the chance for the adventurous to holiday there
    10 best PS4 games

    10 best PS4 games

    Can’t wait for the new round of blockbusters due out this autumn? We played through last year’s offering
    Transfer window: Ten things we learnt

    Ten things we learnt from the transfer window

    Record-breaking spending shows FFP restraint no longer applies
    Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

    ‘Can we really just turn away?’

    Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
    Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

    Nine of Syria and Iraq's 10 world heritage sites are in danger...

    ... and not just because of Isis vandalism
    Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

    Girl on a Plane

    An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
    Why Frederick Forsyth's spying days could spell disaster for today's journalists

    Why Frederick Forsyth's spying days could spell disaster for today's journalists

    The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent