What is short-selling?

Shortselling, also known as shorting or going short, is a trading strategy in the financial markets where an investor or trader sells borrowed securities, such as stocks, with the expectation that the security's price will decline in the future. The shortseller aims to profit from the difference between the selling price and the lower repurchase price.

Here's how the shortselling process works:

1. Borrowing Securities: The shortseller borrows the securities they intend to sell from a broker or another investor. These borrowed securities are typically held in a margin account.

2. Selling the Securities: The shortseller immediately sells the borrowed securities on the market at the current market price. This creates a short position, as the investor now owes the broker or lender the same number of shares they borrowed.

3. Waiting for Price Decline: The shortseller anticipates that the price of the borrowed securities will decline in the future. They aim to buy back the securities at a lower price to return them to the lender.

4. Closing the Position: If the price of the borrowed securities indeed drops as expected, the shortseller buys back the same number of shares in the market to cover their short position. This is known as "covering the short."

5. Profit or Loss: The shortseller's profit is the difference between the selling price and the lower repurchase price, minus any borrowing fees and transaction costs. However, if the security's price rises instead of falling, the shortseller will incur a loss, as they must buy back the securities at a higher price than they sold them.

Shortselling is often used by investors and traders to hedge their long positions or to speculate on a security's price decline. While shortselling can provide opportunities for profit, it also carries significant risks. Unlike a long position, where the potential loss is limited to the initial investment, shortselling has the potential for unlimited losses if the security's price rises significantly. As a result, shortselling requires careful risk management and a thorough understanding of the market dynamics. Additionally, there may be regulations and restrictions on shortselling in some markets to prevent market manipulation or excessive volatility.