Posted in Finance, Accounting and Economics Terms, Total Reads: 724
Definition: Short Selling
Short Selling is the method used by traders who believe that the concerned security's price will drop thus allowing the purchase at lower price. A trader in this case will sell a security which he does not own, has been borrowed.
For instance a trader sees that the stock of company is selling at Rs 1000 and he believes that the stock price will decline. This motivates him to sell the stocks which he has borrowed. After a certain period of time an event say weakened position of the firm depicted in the Financial Report leads to decline of Stock Price to Rs 800.If the trader chooses to close his/her short position, he would buy share Rs 800 to replace the borrowed share. Hence he would make a profit of Rs 200 per share.
Now if he/she waits for the price to fall down further but say the price increased which has been caused by an acquisition by a rival declaring Rs 1100/share as a takeover offer then the trader closing his position will make a loss of Rs 100 per share Hence we can see that the downside is infinite. Thus traders familiar with risk go for short selling.