In the market, it is very common to buy or sell stock. Usually, an investor buys a stock at a lower price and sells it at a high cost. But what if we reverse the scenario and an investor sells the stocks at a higher price and buys them back at a lower price? Yes, this is one of the most emerging concepts that is known as short selling.
Contents
What is short selling?
Short selling simply means lending stock from a broker to sell it further in the market. Later, when the prices of the stock fell, byu-back it again. In simple words, it is the process of borrowing the stock to sell it in the market and buying it again when its price fall.
It is the most common and profitable way of earning. Now you are wondering how can a person earn from selling a stock at a lower price than the usual price. So let us understand this with an example.
Example of short selling
Let us assume that you have a stock named ABC. You want to short-sell it and its current price is $300 per share. You can earn a handsome amount by selling it today because it is offering an amazing margin. So you sell 100 shares @ $300 each. Now you have a balance of $30,000 in your account by selling the stock.
Now let’s assume that the price of this stock fell in the future to $160 each. As this price is lower than what price at which you have sold the stock so now you can repurchase all the stock for $16,000. The difference between the two amounts: at which price you sold ($30,000) and at which price you repurchase it ($16,000) is $14,000 which is your earnings for short selling.
However, if the price of the stock rose to $400, then you are not in a position to repurchase it. But, if you feel that the price will increase more in the upcoming future, then it is better to repurchase the stock at this price. Now to buy it you have to pay $40,000 which means you have to give $10,000 extra. If you are short-selling this stock only then it will be a loss situation for you. But if you are short-selling more than one stock, then you can manage the loss from other profitable short-selling accounts.
Also, one thing you need to consider is that in short selling the stock in which you are trading is borrowed from a lender. So, you have to pay the borrowed amount to the lender. Also, if you have received any dividend out of the stock you need to share it as well but if the contract demands so.
Is short selling a good idea or a bad idea?
Short selling requires a good knowledge of the market, patience, intelligence, and a will to succeed or earn. It is good or bad depending on the efforts you are giving into it. Many investors earn a huge amount from short selling. On the other hand, many investors lose all the earnings they have in short selling.
It is not appropriate for most investors, but it is something that leads you from scrap to success.
There are a lot of challenges one may be faced in short selling a stock. Those who overcome these challenges inspire others and those who fail to overcome these challenges become a lesson for others.
