If you hear people saying "going short" or "shorting a stock", you can be 100% sure they are discussing the short selling. The concept has become extremely popular with traders. It reserves more space for manoeuvre, while investors have access to a wider set of trading instruments.
Keep reading to see:
What's Short Selling?
How the Short Sale Process Works
Real-Life Short Selling Precedents
Core Short-Selling Advantages
How to Start Short Selling with Margin Account
Conclusion: Is Short Selling Good or Bad?
When a trader is "going short" or "shorts", he trades different assets. They may include stocks, currencies or goods. The main idea of the short selling concept is that a trader actually does not own any of those assets during the transaction.
How is it possible? How can one sell something he does not own? Here we have a form of short-term assets borrowing followed by their selling impulsively. You should clearly understand that borrowing is not free. Traders are usually charged borrowing fees and interest rates for using the asset.
The next stage is to predict the asset price in the short run. If price decreases, they return investment by buying the asset back at a lower price, and pocket the difference. Sounds pretty easy, right? Well, the concept comes with some obvious risks and the need for the in-depth market analysis, foreseeing, and price predictions.
So, what is the fuzz all about? What does it mean to short a stock? The idea is very simple: you make money on selling stocks that are about to drop down in price.
The concept itself consists of several baseline stages. They are as follows:
Step 1 – borrowing a stock. As an investor, you find a broker to chose a stock that is about to fall down and borrow it.
Step 2 – selling a stock. You sell the stock and wait.
Step 3 – bringing the stock back. The last phase is to bring the stock back to the lender at the lowest price tag, and make the difference.
A great tool to let you grab your piece of a cake! While the financial market is under pressure, short selling stocks deliver maximum flexibility. It will fit both professional and novice traders.
Let's have a look at how the concept works under real market conditions. The following stages are to clarify how you may sell stocks or other assets and go short:
A trader turns to a broker with the aim of borrowing an asset (a stock, currency, product, etc.). He does not own the asset but is still able to trade it. Let's say, the asset price is currently 100 USD.
At the next stage, a trader sells the asset at 100 USD and then waits until the price drops down. If the predictions are correct, and the price goes down to 45 USD, a trader buys it back and makes the 55 USD difference to pocket.
A trader gives the asset back to a broker. The real profit might be a bit lower, as a trader still needs to repay broker commissions and interest rates for borrowing the asset. The price tag varies from broker to broker.