How did Volkswagen become the biggest company in the world yesterday - for just one day?

Short-sellers of VW shares got very badly burned yesterday. Not that too many will be shedding a tear for any losses incurred by short-sellers. They have been called vultures, rumour-mongers, cheats and even criminals in recent months. Short-selling is where you borrow shares from someone for, a set period of time, let's say a week. You expect them to drop in value, so you sell them immediately with the intention of buying them back at the end of the week at a cheaper price. You pocket the profit and return the shares you borrowed. It is basically gambling on a company's share price falling and is a surefire way of making money from falling stock values. In September, the Financial Regulator banned the short-selling of shares in Irish banks, as it was felt it was accelerating the drop in their share values.

The problem with short-selling VW shares this week was that Porsche bought VW shares at the weekend, leaving few others available and the news of the takeover rose the share price. On Sunday, Porsche announced that it owned, or had options to buy, more than 74% of Volkswagen's shares. VW's home state of Lower Saxony controls 20% of the shares, leaving just over 5% available on the market.

The traders who had short sold now had to buy back the shares at any price to cover their investment - but as there were only 5% of the shares available, the huge demand for them (along with the positive news of the takeover) increased the share price massively. Yesterday, the carmaker's shares peaked at €1,005 (an increase of 348%), which valued the company at €296bn, which is well above the €265bn value of Exxon Mobil, the world's largest company. As an indication of how overvalued the VW market valuation on Tuesday was, Exxon, last year, made profits of $41bn on sales of $390bn whereas Volkswagen managed profits of about $8bn on sales of $136bn.

It is estimated that €18bn was lost in two days by short-sellers! However, VW shares fell 37% in trading this morning as Porsche said it would help to solve the short-sellers' problems. "In order to avoid further market distortions and the resulting consequences for those involved, Porsche SE intends - depending on the state of the market - to settle hedging transactions to the amount of up to 5% of the Volkswagen ordinary shares," Porsche said in a statement.