Accounting for Short Equity Investments
After studying this chapter you should have a grasp of the following:
- Definition of short equity securities.
- Types of short sales.
- Process of short-selling.
- Risks of short-selling.
- Box position and short-selling.
- Rationale of short-selling.
- Regulatory requirements of short sales.
- Meaning of stock lending and an illustration.
- Participants in securities lending.
- Regulation of securities lending market.
- Trade life cycle of short equity investments for trading purposes.
- Journal entries to be recorded during the different phases of the trade life cycle.
- Illustration of short equity shares trading.
- Preparation of journal entries and general ledger accounts.
- Preparation of income statement and balance sheet after short equity investments are made.
- Illustration of short equity shares with box position in functional currency.
- Illustration of short equity shares with box position in foreign currency.
DEFINITION OF SHORT EQUITY SECURITIES
Short-selling or shorting is the practice of selling securities the seller does not own, in the hope of repurchasing them later at a lower price. This is done with the intention to profit from an expected decline in the price of a security, as opposed to the ordinary investment practice, where an investor buys or goes long in a security in the hope that the price will rise subsequently.
The term short-selling or being short also represents strategies that allow an investor ...