In trading and investing, “short” or “short selling” is a strategy where an investor borrows a stock or another asset from a broker and sells it immediately at its current price. Then, the investor aims to repurchase the stock or asset later at a lower price, return it to the broker, and pocket the difference.
Here’s a step-by-step explanation of the process:
- An investor anticipates that the price of a particular stock will drop.
- They borrow shares of that stock from a broker, then sell those borrowed shares at the current market price.
- If the price of the stock does drop as the investor anticipated, they can buy back the same number of shares at the lower price.
- The investor then returns the shares to the broker, keeping the difference between the selling price and the repurchase price as profit.
If the stock’s price rises, however, the investor will have to buy it back at a higher price, and they’ll lose money. Because of this, short selling can be a risky strategy. In theory, potential losses are unlimited because a stock’s price could continue rising indefinitely.
It’s also important to know that brokers can charge fees for lending the stock, and these costs can reduce the profit from short selling or increase losses.
This practice is common in stock and futures markets. However, it can be controversial because it can potentially exacerbate market declines.