Why Sell Short?
The two primary reasons for selling short are opportunism and portfolio protection. Occasionally investors see a stock that they believe has been hyped to a ridiculously high level. They believe that the stock price will fall when reality replaces the hype. A short sale provides the opportunity to profit from the overpriced stock. Short sales are also used to protect an investor’s portfolio against a market downturn. By shorting stocks that the investor believes will fall sharply when the market as a whole falls, investors can help insulate the value of their portfolios against sudden market drops. Zitel provides an example of opportunistic short selling. In 1996, Zitel was caught up in a wave of investor enthusiasm because it has a stake in a company that fixes the computer glitch that causes computers to interpret dates in the next century (2000s) as dates in this century (1900s). This problem, known as the “Year 2000” problem, suddenly became a hot topic of conversation and made it
