Posted in Finance, Accounting and Economics Terms, Total Reads: 106
Definition: Short Sale
Short Sale is a type of transaction between the investor, broker and the market. In short sale, the investors sell the borrowed securities / shares from the broker in to the market. Short selling is done on the speculation that the price of the shares borrowed will fall in future.
The aim of short selling it to gain profit from this anticipation of price going down. The entire process can be explained as, firstly if there is a speculation that the price of the securities will go down in future then the investor borrows securities from his broker and sell it instantaneously into the market at the current price. Now, when the value of the securities falls in future, the investors again buy back the securities at a lower price and gives it back to the broker.
In this entire process the investor has earned the amount, which is the difference of the price of securities when it was sold and bought again.
Short selling is a very risky phenomenon as it is entirely dependent on the speculation that the price of the shares will fall down in future. If this speculation goes other way, then it will amount to huge losses for the investor as he will have to pay more to the broker for the same amount of securities.