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What is short selling?
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Short selling is an investment strategy where an investor borrows shares of a stock from a broker and sells them at the current market price, with the intention of buying them back at a lower price in the future to return to the broker.
Short selling is used when an investor believes the price of an asset will decline.
If the stock price falls after the sale, the investor can buy the shares back at the lower price, return them to the broker, and pocket the difference as profit. However, if the stock price rises, the investor will need to buy back the shares at a higher price, resulting in a loss. This strategy carries higher risks because, theoretically, a stock price can rise indefinitely.
Short example:
Suppose an investor believes a stock currently trading at $100 will decrease in value.
The investor borrows 100 shares from a broker and sells them for $10,000.
If the stock price falls to $80, the investor can buy back the 100 shares for $8,000, return them to the broker, and make a $2,000 profit. However, if the price rises to $120, the investor would need to buy back the shares for $12,000, incurring a $2,000 loss.
Disclaimer: Investing brings risks. Our analysts are not financial advisors. Always consult an advisor when making financial decisions. The information and tips provided on this website are based on our analysts' own insights and experiences. Therefore, they are for educational purposes only.
