Ok, now that I have established a system for margin trading, it is time to move on and consider this other system which I have always been curious about which is short selling.
In the US, short selling is quite interesting as a sale should ideally result in some cash in your hands. You can then deploy this cash into various other long positions.
I've always been curious as to how short selling works but I have no idea how to start. I am somewhat familiar with Contra trading where you sell a stock and then try to buy it back within the next three days but this is more akin to speculation and I can't take up a long-term short position against a stock that is being mis-managed or over-hyped. ( I don't wish to engage in CFDs for now because it's more like getting into a derivatives position. )
The Equity Management textbook mentioned that short positions are very different compared to long positions and are subject to many interesting constraints, some of these constraints are regulatory and others are self-inflicted :
a) You are obviously constrained by a budget which you have set for yourself.
b) Another constraint that is interesting is called Regulation T which applies to equity, convertible bonds and equity mutual funds. Suppose you have $10,000 in your cash account. The sum of long positions and absolute value of short positions cannot exceed $20,000. So if you short $5,000, you can at most create a $15,000 long position. Seems logical but this only applies in the US.
c) Some investor specify a fixed gap between the value of the long positions and the short positions. A 120-20 position has a gap of 100%. A market neutral portfolio has a gap of 0.
d) Some securities are simply hard to borrow and the broker will not even allow you to short those counters.
I would really appreciate it if a reader would point me towards some kind of short selling facility for local stocks.
As of now, the closest thing is my margin account which is basically shorting a 2.88% bond to buy REITs and Business trusts.