Theory Of Selling Short
Short selling is a pretty easy theory to understand. Most people while buying stocks expect an increase in the price of the stock. People, who buy to sell the stock when the price has increased and want to make a profit, go for the long sale. The short sale is quite the opposite. |
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In the case of a short sale, the person is borrowing the shares from a third party like a broker, for example. The broker lends them the shares of the company by taking them from different brokering firm or another inventory with them. The investor, who is borrowing these shares, has to return the shares within a said period of time. It could be a month or a couple of months. The investor is willing to buy the shares or stocks because they know that the price of the same will fall. The investors account is credited with the proceeds of selling these shares.
However, at a future point of time when you have to return these shares, you can either buy back the shares at a fallen price as estimated by you or if the price has increased, then you will have to bear the loss.
Understanding short sale is an extremely simple process. Because you are selling the stocks in anticipation that the price will fall, it is called a short sale. When you sell, it is a higher price today, and tomorrow when the price is low, you can buy back exactly the same number that you sold and then give it back to the investor. The investment money is not from you directly. It is from the borrower. If the price of the share falls, you stand to gain, but if the price of the stock increases, the investor makes the money and not you.
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