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Germany bans short-selling- Implications on European markets

Germany’s ban on short-selling has had some serious disagreements not only from within but also members of the Europen Union (hereafter mentioned as EU). The commissioner of the EU financial services has thrown in his abject at the decision made by the Chancellor of the country

To know its implications better we’ll first define the methodology followed “legally” by traders/investors.

Short selling is defined as the selling of a security that the seller doesn’t own, or any sale which is only completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they initially short-sold.

The ban has been declared by BaFin ( the German regulator ) as effective until March 31, 2011. According to BaFin, short-selling was and is a reason behind excessive price movements and as per the statement issued “which could have led to significant disadvantages for financial markets and have threatened the stability of the entire financial system”.

There is an expectation that there could be a major backlash by major German financial institutions as well for the move will also prohibit short-selling of shares in major German financial institutions, such as Allianz. Commerzbank, Generali Deutschland and Deutsche Bank; a move which could anger global investors.

Such a move as the one made by Germany, looks a bit far-fetched from producing tangible results, and as of now looks to have had some serious damage globally as the market can clearly see further signs of weakness not far away.  

The last time such a move was made by the Americans, the stock market crash was discovered,  it is not so unlikely that a move which has clearly been met with by divided opinions even within the EU may not cause yet another calamity.

Similar measures also look to be put into action against “speculators” as observed by the US and UK in the wake of the financial crisis and recession in 2008 following the collapse of Lehman brothers.

However, despite of the fact the decision looks to limit volatility and prevent some sort of raid on debt or equities; it is worth paying attention to as having witnessed the decline of global economies only just recently.
All said and done, the move certainly looks to improve market conditions across the globe, in particular the EU. As for the ban on “naked” short-selling, cash inflow will increase against its outflow which will decrease in time, thereby stabilizing the market instead of causing volatility.
Our domestic market is currently on a negative overdrive because of Global (in particular European) cues, but looks set to improve soon as well. It would be advisable if you trade carefully with diversifying your investments. In using our recommendations, you will be able to do stock specific buying which will only add to your portfolio.


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