Short selling is a trading strategy that involves selling securities that the trader does not own, with the intention of buying them back at a lower price in the future. The trader borrows the securities from someone else, typically a broker, and sells them on the market. If the price of the securities declines, the trader can buy them back at the lower price, return them to the lender, and pocket the difference as profit.

We can look at the step by step process in the example below:

• 1. Short seller borrows the shares from their broker

• 2. Short seller immediately sells the shares in the market

• 3. Short seller buys the stock in the open market

• 4. Short seller returns the stock to the lender

For example, suppose a trader believes that the price of a particular stock is likely to decline in the near future. The trader could borrow shares of that stock from a broker, sell them on the market, and then wait for the price to drop. If the price does drop, the trader can buy the shares back at the lower price, return them to the broker, and make a profit.

However, if the price of the stock goes up instead of down, the trader will lose money. Short selling carries additional risks beyond those associated with regular stock trading, such as the risk of unlimited losses and the need to pay margin or collateral to the lender of the securities. As a result, short selling is generally considered a risky strategy that is best suited for experienced traders.

Please note, none of the information on this blog represents the opinion of my employer and all information does not represent a financial advice.