Stocks are the most common financial assets of a company. They represent the capital of a company divided into small units. The persons who hold the stocks are known as the stockholders or shareholders. Usually, people say an individual, an investor or a company, or any other corporate body invests in stocks to increase their financial stability. Stock acts as a security guard of the money invested and at the same time becomes a most prominent source of regular income by the way of dividends. There are many ways to buy or sell a stock. One of them is short selling.
Short selling is an activity, process, or investment in which an individual borrows a stock from a stock lender to sell it in the market at the current price. Afterward, when the current price of the stock falls, he repurchases the stock he sold previously at a lower price. By this, a person can earn a huge margin by selling a borrowed stock at a high price and then repurchasing it at a lower price to return it to the lender.
Why one should opt for short selling?
Buying a stock or selling a stock is a very long-term process. In buying a stock your money is saved forever and you received a regular income in the form of dividends for upcoming years. But still investing in stock means opening a fixed deposit from which you cannot take your money back for many unknown years. This is because the money you invested in stock is paid back to you at the time of winding up of a company.
To ignore this situation or to get the money back, sometimes the shareholders share their stock in the market. It is a usual phenomenon. But to avoid all this stuff, you can simply go ahead with short selling. Today you are selling a stock and in the upcoming year or two years or within a year, if the price of the stock falls you can buy it again.
Short selling overcomes all the drawbacks of long-term investment in stocks. It is time-saving and profitable. But, for short selling business, you need a good knowledge of the market, patience, hard work, time, and effort.
How does short selling work?
When you are short-selling a stock, you always assume that in the upcoming future, the price of a particular stock falls. If there is no chance of falling off the price, you cannot short-sell. Because the entire short selling is based on the assumption that the price of a particular stock will fall in the future.
In short selling, you reverse the concept of “buy at a low price and sell at a high price” to “sell at a high price and buy at a low price”
The following are the steps of how to short sell a stock or how the short selling work:
Find a suitable stock
The very first step in short-selling a stock is to find a suitable stock. This is the most difficult task as you have to find a stock whose prices are likely to fall in the upcoming future. It requires thorough research and an understanding of the market and how it works. Without a piece of proper knowledge, you cannot find a suitable stock.
Place an order
After you have to find suitable stock, the next step is to place an order to sell the stock that doesn’t belong to you. While selling the stock, it is assumed that you are selling your stock and not a stock that belongs to someone else.
Wait for the price to decline
Once you have sold the stock, you continuously have to check the prices of the stock. You have to wait until the prices fall. As the market is unexpected and uncertain the price may fall at any time. It may fall into one hour, one week, one month, or one year. So you have to wait patiently.
Repurchase the stock and close the account
As soon as the price of the stock falls, you have to repurchase the stock and close the account. If you wait to do it later, then you might lose the chance, as the price can rise again at any time. So repurchase the stock as quickly as you can. The difference between the selling amount and the repurchase amount will be your profit earned.