Short selling definition

What is short selling?

Short selling is the act of selling an asset that you do not currently own, in the hope that it will decrease in value and you can close the trade for a profit. It is also known as shorting.

Short sellers tend to use this strategy for either speculation – in the hope that downward price movements return a profit – or as a method of hedging.

How to short sell

Most traders will short sell in one of the following ways:

  • Via a broker. Short selling via a broker means that the broker will sell the asset for you and add the funds into your account on credit. When you close the position, you buy back the asset and immediately return it to your broker.
  • CFDs. These are contracts to exchange the difference in price of an asset from when the trade is opened to when it is closed. Selling a CFD means profiting if its price drops. CFDs are traded on leverage.

Short selling via a broker means that your broker has to find someone willing to lend them the stock; usually a long-term investor who is unlikely to need it back in the short term. If no one can be found to lend the stock, it is known as unborrowable stock.

Short selling can be a risky strategy, as assets can theoretically increase in value indefinitely. Leveraged products can increase risk further, and as such require careful risk management.

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