DTH and short selling: how does it work?

DTH and short selling: how does it work?

According to a particularly widespread representation that the uninitiated have of the stock market, the evolution of prices simply determines the fate of shareholders who have invested part of their fortune in the purchase of shares.

It is therefore up to them to anticipate the rises and falls as well as possible in order to resell at the appropriate time – to make a profit. This mechanism is obviously not mythical and corresponds to many financial operations. However, other more complex approaches punctuate the daily life of some investors, approaches whose existence or operation is easy to ignore when starting out in the field.

Among the range of possibilities may be the SRD or Deferred Settlement Service – and through it short sales take place , the mechanism of which it seems important to explain.

Short selling: overcoming counter-intuition

Short selling (or VAD) could put off neophytes. Indeed, a priori, one can only sell what one possesses, what one has acquired. But in the stock market, the virtualization of the stakes turns out to be, if not automatic (because it is always possible to stick to “classic” investment), at least perfectly possible. Having recourse to a short sale (VAD) supposes that said a more substantial risk-taking since to compensate for the absence of direct pecuniary commitment, and therefore the sale of a share actually acquired, it is necessary to rely on the commitment of an intermediary, to whom it will be necessary to render accounts at the end of the stock market month.

Before describing this system more precisely, let us note that in reality, this type of operation also exists in daily life. Anyone who has borrowed a sum of money from a banking organization to carry out a project undertakes to return the amount according to defined terms – he, therefore, agrees, initially, to spend what he has not really earned . The comparison holds to understand the “spirit” of a VAD but does not resist all the subtleties. And for good reason: this stock market mechanism does not imply a purchase, but a sale .. Logically, the investor should expect a decline that will be profitable. The gain generated will come to pay off the debt contracted and, ideally, inflate his fortune. If the forecasts turn out to be bad, on the other hand, the seller may find himself in a difficult situation.

short sale

The SRD: other actors come into play

In fact, if we closely observe the workings of distance selling, the issues are hardly different from those governing a “traditional” purchase. It is, as always on the stock market, to speculate in the hope of having anticipated the flows well. But it must be kept in mind that selling without having systematically presupposes the intervention of a guarantor, of an intermediary actor in addition to the deal.

All the organizations and individuals aiming to regulate and guarantee the existence of VAD respond to the name of “SRD” , or as we said earlier “Deferred settlement service” . The term is telling. Since gifts do not exist in the financial markets, the investment is in fact postponed to a later date, defined by a regulated calendar.

A beginner, therefore, does not necessarily have an interest in embarking on such an adventure from his first steps on the stock market. In all cases, and as for any financial company, it is advisable to inquire conscientiously about the various services available, to appreciate the corresponding methods. For example, an investor may be offered a month-to-month rollover; the stakes swell proportionally and the addition can prove salty if all the parameters have not been taken into account.

To conclude: a widespread approach… at an advanced level

A VAD is in short perfectly conceivable and is of interest to many players on the stock market. Moreover, and fortunately, this solution is officially regulated: certain sales are prohibited and deemed too out of step with the realities of the market. A regular will, therefore, in principle, be able to make judicious choices and avoid dangerous collaborations. But in any case, and as we cannot say enough when it comes to discussing the stock market, the risks are real, and an SRD organization that advocates the absence of them would be dishonest. If the stock markets can be invested like playgrounds by some, they are nonetheless minefields when you don’t have the necessary perspective and information. Before committing to a VAD, before having recourse to an SRD, the usual questions must be asked: to what extent does an early sale seem reasonable? Could the area in which you are investing be subject to major disruptions? Is the call for an SRD therefore reasonable? Even after answering these questions, the result can be disappointing. A short sale should therefore never be imagined as a good means of postponing investment, but as a preferred alternative depending on the situation and the opportunities.

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