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Short Sale: What is it?

Are you familiar with short selling? Many investors are making great profits through this strategy. In this article, we’ll talk more about this type of selling and how we can use it to generate profits. Good reading!

What this article covers:

What is short selling?

In the financial world, it is very common for some investors to try to generate profits by buying assets when they are low and selling them when they are high. This strategy is very popular in many areas of the financial sector.

Short selling is widely used for this purpose, being a risky operation, but one that can guarantee large profits for investors in the short term, especially when the market is falling, when the price of shares generally falls.

Source/Reproduction: original.

Bearing this in mind, we can say that short selling consists of trying to predict the market’s expectations regarding the price of an asset. With this, the investor sells his asset on the high and tries to buy it on the low, when the price is falling.

The repurchase period can vary greatly, according to the market, and can be done on a day trade or on longer dates.

It is worth noting that in short selling, the shares do not belong to the seller. But how can anyone sell something that doesn’t belong to him? For this, the investor uses shares of third parties. In this environment, the position of those who make a short sale is known as a “short position”, or short.

Let’s use an example: imagine you’re buying a stock that costs $100.00. But you heard some rumors that the price was going to go down, or you studied the market and saw a downward trend.

So, thinking about making a profit, you rent that stock and sell it before its value plummets. If you’re right and the price actually drops to, say, $80.00, then you can buy it, making $20.00 profit.

How does short selling work?

Short selling is selling a stock that you don’t own. To carry out this type of sale, you must first make two types of transactions: rent a share and then sell it.

How does short selling work?
Source/Reproduction: original.

But you might wonder: how can I sell something that doesn’t belong to me? Well, the short sale is carried out when there are profit expectations on top of a downward trend in a given stock. That is, you carry out this process because you believe that the share price will fall. After the stock’s value drops, you will then return the stock and buy it at a much lower price and profit from the difference between buying and selling.

What is the risk of selling short?

Like almost everything else in the financial market, short selling has its risks?? It may be that the opposite of what you expected occurs, and the value rises, causing you to have to pay more to buy back the asset, thus having a loss, not a profit. Finally, when the transaction is finalized, you must return the shares you borrowed.

When is it a good idea to use short selling?

The biggest advantage of using the short sale is to continue trading in the financial market even in times of crisis, since the short sale is made for situations of fall in stock prices.

Another great benefit of short selling is that it allows you to take advantage of opportunities through stocks that are not in your portfolio. Thus, short selling is also widely used as a form of protection in hedge operations, as a way to counterbalance the results of investments.

With all this, we came to the conclusion that short selling can be a great source of quick profits, but that it should only be operated by experienced people, who are aware of the risks and strategies of this type of transaction.

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