The two simplest trading/investment strategies are:
Buying Long and Short Selling
Buying long is simple, you buy shares and expect the price to go up in a day(while trading) or over a period of time (for investments).
But, people often tend to get confused with the concept for Short Selling (or Short). This is because, in Shorting you expect the price to go down. The more price goes down, the more money you make.
Let’s break it down in a simpler way.
What is Short Selling
Short Selling is a strategy that is used by experienced traders and investors.
Traders use this strategy when they expect the price of a stock to fall down due to market conditions or news.
How Short Selling Works?
In Shorting, the trader borrows the shares from open markets through his broker with an obligation that he will square off his position before the market closes. If the trader doesn’t square off his position, then the broker will automatically square off on the trader’s behalf.
Shorting is only available for Intraday and Futures and not for delivery.
How Profit/Loss is made in Short Sell?
You made a Short Sell on ABC Ltd. at Rs 100. This means, you have borrowed and sold shares of ABC LTD at its market price. You dont own these shares. Now, you speculate that the price will fall.
Scene 1: The price falls to Rs 90. This means that you have made profit of Rs10 per share.
Scene 2: The price rises to Rs 110. This means that you have made loss of
Rs10 per share.
Short selling is useful for traders who want to make profit when the market is down/crashing.
Movie Reference: A film “The Big Short” is based upon 2008 Subprime Crises where a fund manager makes profit by shorting the American Household Market.
Thank You for reading
Finance graduate with a strong desire to understand the complexities of financial markets. I make financial judgments for my investments based on the information I gained during my academic education. I write articles about financial literacy for dstreetanalyser.com in order to promote financial literacy among the general public.