FRA issues first short selling license to Arqaam
Arqaam gets Egypt’s first short selling license from FRA: Arqaam Securities Brokerage has officially become the first brokerage firm allowed to short sell after receiving a license from the Financial Regulatory Authority (FRA), the regulator said in a statement (pdf).
What’s a short? Let’s pretend that you believe that shares of Company X are overvalued. Shorting allows you to profit on this belief. At the simplest level, it works like this:
- Step 1: Borrow a load of company X’s shares (likely from someone who wants to hold them long-term);
- Step 2: Sell them immediately back to the market;
- Step 3: Pray the price goes down (and mount an activist campaign if you have to…);
- Step 4: Buy them back on the open market and return them to their rightful owner to “close out your position”;
- Step 5: Pocket the difference (presuming, of course, the price went down).
Background: Under FRA regulations, you can only short 20% of a company’s freefloat shares while any one shareholder won’t be able to lend more than 5% of a company’s shares. The regulations also cap the total percentage of any company’s shares that can be used to create a short position. Folks looking to open a short position will need to put down 50% of the value of the securities borrowed, and brokerages will be required to park that sum in fixed-income assets while the position is open. We have an EGX-approved list of short sell-able stocks here.