You may have noticed that each Friday over the past couple of weeks we get a bit of strength in stock markets especially in the morning. I learned over many years never to buy stocks (or ETF’s) on Fridays because it’s usually the day that short-sellers close out the positions. Nobody wants to carry a high risk bet over a weekend.

“Short covering, also called “buying to cover”, refers to the purchase of securities by an investor to close a short position in the stock market. The process is closely related to short selling. In fact, short covering is part of short selling, which involves the risky practice of borrowing and selling stocks in the hope of buying them back at a lower price, thus generating profits.”  (https://corporatefinanceinstitute.com/)

How does short-selling work?  Imagine you thought the housing market was about to collapse – causing home prices to fall.  You don’t own a house, so you arrange to sell your neighbor’s house to a third party.  You sell it for cash, and tell the new owner he can move in 2 months later.  Suddenly as you expected, housing prices plummet.  The buyer no longer feels he can own the home (afraid home values will fall further; below his mortgage obligation).  You offer to buy it back from him at a lower price and he agrees.  Sounds absurd right?  Well it is of course illegal (and has happened to the odd poor unsuspecting soul).  Not in the stock market – it’s called naked short-selling.  In my opinion it should be illegal in all markets.

 

 

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About the Author

Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He authored A Maverick Investor's Guidebook which blends his experience touring across the heartland in the United States with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources which he authored with Pamela Clark — predicted the resources boom back in early 2004.

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