What Is the Difference Between a Short Position and a Short Sale?

What Is the Difference Between a Short Position and a Short Sale?

A short position and a short sale are very similar concepts; for this reason, they are often collectively referred to as "shorting," and the two terms are quite commonly used interchangeably. The difference between the two lies in the subject of the transaction.

Understanding the Difference Between a Short Position and a Short Sale

While short selling and short positioning generally refer to the same thing both in common parlance and technical jargon, there are some instances where short positioning is not the same as short selling. A transaction undertaken by means of a derivative contract is a short position, but it is technically not a short sale because no asset is actually delivered to the buyer. Therefore, when the transactions involve futures, options and swaps, it is short positioning and not short selling.

In both cases, the aim of the trader is to sell the items at a high price and then to purchase them back at a lower one. The profit accrued from these techniques is the difference between the price at which the trader sold and the price at which they were purchased back.

As shorting refers to borrowed commodities, they must be eventually returned to their rightful owner, so buying them back is a necessity. For this reason, it is a very risky strategy and should only be undertaken by experienced traders who know when to short a stock. This can be done at any time before the time the securities are supposed to be returned. Purchasing the sold goods back is referred to as both "covering the short" or "covering the position."

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