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What Is Short Selling?

Posted by on Jun 15, 2017 in Uncategorized | Comments Off on What Is Short Selling?

When a trader/ investor sells security/ stocks which he does not actually possess, only to re-purchase them later. The security’s price may have an anticipatory fall, enabling the sellers to repurchase it and benefit from the profits incurred. The security is not owned to be sold, rather it is a borrowed asset and hence repurchasing it at a lower price than the selling price is beneficial to the seller.

Pointers to be kept in mind to understand the nuances of short selling:

  • Short selling takes place due to trade speculation; when the prices of the stocks of a security is suspected to decline in the near future an investor may be prompted to borrow the shares in that security and sell them. Later he may purchase them at a lower price in the open market than his selling price and replace the borrowed shares.
  • The short sale is profitable only when there is excess amount after the repayment of shares and excluding the commissions. The margin should be big enough to yield substantial returns to the investor; only then can the short selling be considered a worthwhile deal.
  • Shorting as shorts selling is often called, helps the investor to earn from the difference in the selling and re-purchase price. It is a very risky proposition to carry out and may not turn out as beneficial especially when the prices increase after a sale, and this in trading language is known as ‘short squeeze’. When a lot of buyers vie for purchase of the just released stocks in the market, the repurchase becomes a huge burden due to the price increase. The selling and the buying of the security stocks happen almost consequentially and unless one is well versed in the market trends and a trained eye for price patterns, short selling is a risk-filled venture to undertake for any individual investor.
  • Any investor wishing to short sell needs to keep in mind the liquidity factor of the stocks that he wishes to short sell. When the liquidity is low, it is difficult to sell and even more to repurchase it.
  • Investors looking at short selling as a regular investment venture need to be aware of margin calls.

When trading in the binary options market, the risks involved in short selling may come down because automated apps like the Millionaire Blueprint allow individual investors to run the software in the background which can read predict trading opportunities and potential in even relatively obscure areas and thus be able to generate a decent success rate.

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