Trading is a risky way of earning money, and for some, it is an adventurous game with many ups and downs, quite literally. The anticipation of the stock values going up is itself an exciting and sometimes challenging process. Traders are the happiest when they see the prices of the stocks increasing. This is when they sell the stocks they bought at a lower price and profit from them. But this is not always the case. Sometimes it is quite the opposite. A different strategy is seen playing to make profits called short selling. For those who don’t know what that is, read further.
Short selling is a concept where profits are made when the prices of stocks are going down. The investor borrows the stock and sells it at a certain price. Once sold, the investor waits for the price of the same stock to lower down and buy it. The stock is then bought at a lower price. The bought stock is returned to the one it was borrowed from by keeping the profit in the pocket which is the difference between the selling price and the bought price. Short sellers are waiting and betting on the stock price to lower. This strategy works for the short-sellers as the stock price has more chances of lowering than going up in a certain period.
There are many risks associated with short selling however the short sellers have to take some measures to lower those risks. There are periods when the stock prices are bound to go down. Short sellers keep track of those periods and access the time frame when they should go with the strategy. For example, when a company is seen to go into debt, short sellers take a step and wait for when they do. Short selling is not as popular as long selling as investors find it safer to buy the stocks. There are two main reasons why investors choose this strategy
Speculation, when related to stock trading, means to speculate a stock that is overpriced. The future price of the stock is anticipated based on the high price. The trades involve companies with high risks and obviously a high reward too. New companies that might not have a history of profitability are the most eligible for speculative trading. Short selling is all based on speculation.
Short selling can be used for hedging too. Hedging is a risk management strategy that offsets losses by making an opposite trade. The long sellers become short sellers at the same time. Hedging might reduce the risk of losing but it also reduces the potential profits. One of the two sides has to lose in this game and traders know this. When a long seller also becomes a short seller, he has to lose from one side. But when done strategically, the profits can be a lot higher than the losses.