• Definition of short selling (shorting)

Short selling refers to any investment or trading strategy, which speculates on the decline in a stock or other securities price. Investors appreciate their investment when prices fall.

 

• When investors short sell securities

Investors short sell when they believe that securities price is about to drop. They use shorting either for speculation or hedging. Speculation is used for investment appreciation from potential decline of a concrete security. Another option is hedging employed to offset losses in securities or portfolios.

 

• How short selling works

When the investor decides to short sell, he offers his position through financial instrument, which is expected to be declining. The investor offers these borrowed financial instruments to a buyer willing to pay the market price. The seller must commit that the price will further decline and its purchase is possible before return of the financial instruments.