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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