Shorts Make Volkswagen #1

What a week as the S & P posted its largest gain in almost 35 years and its worst month since 1938.  As short selling and naked short selling in particular is creating more volatility, I thought I would touch on something interesting where the naked short selling of shares in Volkswagen created the worlds most valuable company overnight.

For those who may not know what short selling is, it involves the practice of selling stock today with the hope that the share price will decline in the future. By buying the stock back at a lower price, you would cover your short position and make a profit. Should the stock price go up, you would have a loss.

Legally speaking, in order to short sell stock, there must be shares available to short. If you call your broker to short sell a postion, they should have the stock in inventory allowing you to do so. If they allow you to short and dont have stock available, this is called a naked short or naked short selling.

Porsche that was thought to own about 35% of the outstanding shares disclosed that it actually owned 74%. VW’s home state of Lower Saxony owns 20% which leaves only 6% available for shorting purposes. There was lack of disclosure on Porsche’s part that it owned so much of VW as the disclosure was not required by the German Stock Exchange.

VW’s stock closed on Tuesday at 1,005 Euro or $370 Billion US overtaking the Exxon that had a value of $343 Billion. Hedge Funds lost over $35 Billion US in two days on this trade alone. However, Porsche indicated that they would help alleviate some of the hedge fund problems by allowing more of their shares to be borrowed in the marketplace for shorting purposes. VW’s shares closed at 475 Euro by the end of the week.

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