Short Selling
by fundsacademy.com
What is Short Selling?
• When an investor bets on the price of an asset falling
• The opposite of buying shares or ‘going long’
What transactions are involved?
• Investor short sells an asset - To do this they borrow the asset from a broker
• To close the position the investor buys the asset (buy to cover) on the market at current prices
• Investor returns the asset to the broker
Short selling transaction flow:
How is P&L calculated?
• An investor short sells shares, below are the P&L outcomes when the position is closed:
• Price has risen – The trade makes a loss
• Price has fallen – The trade makes a profit
What are the reasons for short selling?
• Speculation: to gain exposure to risk
• Hedging: to reduce risk on existing long positions
What risks are involved?
• Unlimited exposure: while long positions can only fall to zero in theory the price an asset can rise to is unlimited.
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