Question

True or False

Shortselling is one of the mechanisms that keep the market efficient.

Shortsellers face limited downside risk of losing and unlimited upside reward of profiting.

Shortselling is a lot more riskier than regular ‘buy and sell’.

Shortsale deviates from the convention of “buy low sell high”.

Equity holders share firm's profit after bondholders.

Answer 1

True or False:

The first statement is TRUE,

Short sellers, help in creating a healthy and efficient market in various ways including the formation of a contrarian view, adding liquidity to the market .Short selling strengthens the market by exposing which companies' stock prices are too high. Short selling improves market dynamics.

Short sellers facing unlimited downside risk and limited upside potential. Stocking involves use of borrowed money and looses can be infinite as in case the stock price rise it can go till infinity and the maximum that a stock can fall is zero, so the losses are limited.

So, the second statement  is a false statement.

Yes short selling is a lot more riskier than the regular buy and sell.As, the short seller buys securities on a margin and even pays interest on the borrowed amount. In case, the strategy does not pay off, the trader can suffer huge losses.

Yes, short selling deviates from the convention of buy low and sell high.

• Short selling occurs when an investor borrows a security and sells it on the open market, planning to buy it back later for less money.
• Short sellers bet on, and profit from, a drop in a security's price.
• Short selling has a high risk/reward ratio: It can offer big profits, but losses can amount quickly and infinitely.

The fourth  statement is true.

Yes it is true that equity share holders share profits after the bond holders.

As per the pecking order theory, the profits are first distributed to the bond holders , then to the preference share holders and the equity share holders are paid last in order.

The fifth statement is a a true statement.