Short Selling


What is Short Selling?

Short selling is when an investor borrows a security and sells it on the open market, intending to repurchase it for a lower price later. Short-sellers bet on a security's price falling and profit from it. On the other hand, Long investors are hoping for a price increase.

Example of Short Selling:

When the company reports its annual earnings in a week, an investor believes Stock A, which is currently selling at $100 per share, will fall. As a result, the investor borrows 100 shares from a broker, and short sells them to the market.

Why is Short Selling necessary?

Short selling is a critical component of efficient capital markets, providing positive advantages through promoting secondary market trading of securities through increased price discovery and liquidity and improving corporate governance and, ultimately, the actual economy.

Topics: ACCA, CIMA, CPD, AAT, FRM