Short Selling: Conclusion
AAA
  1. Short Selling: Introduction
  2. Short Selling: What Is Short Selling?
  3. Short Selling: Why Short?
  4. Short Selling: The Transaction
  5. Short Selling: The Risks
  6. Short Selling: Ethics And The Role Of Short Selling
  7. Short Selling: Conclusion

Short Selling: Conclusion


By Brigitte Yuille

Short selling is another technique you can add to your trading toolbox. That is, if it fits with your risk tolerance and investing style. Short selling provides a sizable opportunity with a hefty dose of risk. We hope this tutorial has enabled you to understand whether it's something you would like to pursue. Let's recap:

  • In a short sale, an investor borrows shares, sells them and must eventually return the same shares (cover). Profit (or loss) is made on the difference between the price at which the shares are borrowed compared to when they are returned.
  • An investor makes money only when a shorted security falls in value.
  • Short selling is done on margin, and so is subject to the rules of margin trading.
  • The shorter must pay the lender any dividends or rights declared during the course of the loan.
  • The two reasons for shorting are to speculate and to hedge.
  • There are restrictions as to what stocks can be shorted and when a short can be carried out (uptick rule).
  • Short interest tells us the number of shares that have already been sold short in a security.
  • Short selling is very risky. You can lose more money than you invest but are limited to 100% profit on the upside.
  • A short squeeze is when a large number of short sellers try to cover their positions at the same time, driving up the price of a stock.
  • Even though a company is overvalued, it may take a long time for it to come back down. Fighting the trend almost always leads to trouble.
  • Critics of short selling see it as unethical and bad for the market.
  • Short selling contributes to the market by providing liquidity, efficiency and acting as a voice of reason in bull markets.
  • Some unethical traders spread false information in an attempt to drive the price of a stock down and make a profit by selling short.

  1. Short Selling: Introduction
  2. Short Selling: What Is Short Selling?
  3. Short Selling: Why Short?
  4. Short Selling: The Transaction
  5. Short Selling: The Risks
  6. Short Selling: Ethics And The Role Of Short Selling
  7. Short Selling: Conclusion
RELATED TERMS
  1. Bear Closing

    Purchasing a security, currency, or commodity in order to close ...
  2. Crowded Short

    A trade on the short side with an overwhelmingly large number ...
  3. Gross Exposure

    The absolute level of a fund's investments.
  4. David Einhorn

    Known for his short selling strategy, activist investor David ...
  5. Bid Wanted

    An announcement by an investor who holds a security that he or ...
  6. Short Call

    A type of strategy regarding a call option, which is a contract ...
RELATED FAQS
  1. Is short selling a form of insurance?

    Short selling really isn't a form of insurance. It is the opposite of going long or buying a stock with the hope that the ... Read Full Answer >>
  2. What kinds of restrictions does the SEC put on short selling?

    Since the stock market crash in 1929, and the ensuing Great Depression, short selling has been the scapegoat in many market ... Read Full Answer >>
  3. What is a stock split? Why do stocks split?

    All publicly-traded companies have a set number of shares that are outstanding on the stock market. A stock split is a decision ... Read Full Answer >>
  4. Is there a difference between financial spread betting and arbitrage?

    Financial spread betting is a type of speculation that involves a highly leveraged derivative product, whereas arbitrage ... Read Full Answer >>
  5. How do I place an order to buy or sell shares?

    It is easy to get started buying and selling stocks, especially with the advancements in online trading since the turn of ... Read Full Answer >>
  6. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!