What is Short Selling?

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Short Selling Overview

  • Short selling is when an investor borrows shares of a company’s stock from a brokerage with the intention of buying it back after the company’s share price has fallen.

  • A short investor profits from a decline in a stocks share price, as opposed to a long investor who profits from an appreciation in a stocks share price.

  • Short selling has a high risk/high reward ratio. It can produce significant profits on bad news or in a bear market, but losses can mount quickly upon good news or in a bull market.

  • Short selling is an advanced trading strategy that should only be undertaken by experienced traders and investors.

Example of Short Selling

ACME Industries is a heavy equipment manufacturer who’s products are used worldwide in large scale infrastructure projects. Industry analysts are predicting a global economic slowdown which could negatively impact infrastructure investment projects worldwide. The short seller looking to capitalize from this anticipated market downturn opened a trade by borrowing 100 shares of ACME at $20/share. As predicted, an economic slowdown occurred and infrastructure investment slowed, driving shares of ACME down to $10/share. The short seller later closed the trade by buying back 100 shares of ACME for $10/share, for a profit of $1,000.

-Happy Trading, Verdia

Charles E Winchester