CHAPTER 12

Accounting for Short Equity Investments

LEARNING OBJECTIVES

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

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 ...

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