| If you are a novice investor in the stock market, you | | | | those shares, which is why you need to borrow the |
| will undoubtedly have come across the term "short | | | | shares for as long as you have an open short |
| selling", but you may not know exactly what it is. | | | | position. If all goes according to plan, the price of |
| This article will provide a brief introduction. | | | | those shares will drop, you will be able to buy them |
| Very simply, short selling is where you sell stock you | | | | back at a lower price, return them to the broker |
| don't actually own. The first question that springs to | | | | from whom you borrowed, and you will have made a |
| most people's minds when they hear this is "how can | | | | nice profit on the transaction. |
| you sell something you don't own?" Simple, you | | | | Not everyone has a broker account that facilitates |
| borrow the shares from your broker, who either | | | | short selling and borrowing. A standard share dealing |
| owns shares itself or has an arrangement with | | | | account does not usually provide the facility, you |
| another institution to facilitate the lending and | | | | need to set up a margin account and be approved |
| borrowing of shares. | | | | for borrowing. In order to set up such an account, |
| Generally, investors and traders who sell stock short | | | | you will have to place funds on deposit. The amount |
| do it for one of two reasons. Either they think the | | | | of that deposit will depend upon the broker. The |
| price of those shares will drop, or they perform the | | | | reason you have to deposit such funds is that short |
| trade as part of some hedging strategy. We will | | | | selling is inherently more risky than just buying shares |
| focus on the first of these these two reasons, i.e. | | | | because the risk, theoretically, is unlimited. Think |
| selling short to capitalize on a predicted fall in price. | | | | about this for a moment. If you buy shares, the |
| Short selling is a little bit more complex, and maybe | | | | maximum amount you can lose is the price you paid |
| harder to conceptualize, than buying shares. When | | | | for the shares, because the share price can never go |
| you buy stock it is a simple process and easy to | | | | below zero. Id you sell short on the other hand, there |
| understand. You pay a price to buy shares in a | | | | is no limit to how far the price can rise, so you |
| company and then you own those shares. When you | | | | potentially lose a lot more. |
| sell short, it is not so simple. What you are doing is | | | | This was a very brief introduction to short selling, but |
| promising to deliver shares to whoever has bought | | | | hopefully it has helped clarify the process. |