A:

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. 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."

RELATED FAQS
  1. What Part of a Company's Float Can Be Shorted?

    The quick answer: The number of shares shorted can actually exceed 50% of the float in a company. Read Answer >>
  2. How long should you hold on to a short?

    Explore the reasons for short selling and the various factors that influence how long an investor may wish to maintain a ... Read Answer >>
  3. How does one make money short selling?

    Short sellers make money by betting a stock they sell will drop in price. If it drops, the short seller buys it back at a ... Read Answer >>
  4. Here's What Short Sellers Must Do to Short a Stock

    Learn what benefits a short seller is required to make up to the lender of shares, or long investor, when shorting a stock ... Read Answer >>
  5. Can you short sell stocks that are trading below $5? My broker says that I can't.

    Although it is not a requirement set by FINRA or the SEC, brokers will often tell investors that only stocks above $5 can ... Read Answer >>
Related Articles
  1. Investing

    Why Short Sales Are Not For Sissies

    Short selling has a number of risks that make it highly unsuitable for the novice investor.
  2. Trading

    Short interest: What it tells us

    Whether you agree with the overall sentiment or not, short interest is a data point worth adding to you overall analysis of a stock.
  3. Trading

    Guide to Short Selling

    Want to profit on declining stocks? This trading strategy does just that.
  4. Trading

    The Short Squeeze Method

    Trading a short squeeze can be risky, but also very rewarding for those who master it.
  5. Financial Advisor

    The 5 Most Shorted NYSE Stocks (VALE, CHK)

    Understand what a short sale is and why people would want to initiate a short strategy. Learn about the top five most shorted stocks on the NYSE.
  6. Investing

    Rules and Strategies For Profitable Short Selling

    Short sales work well in bull and bear markets but strict entry and risk management rules are required to overcome the threat of short squeezes.
  7. Trading

    How To Protect A Short Position With Options (FB, AAPL)

    Short selling can be a risky endeavor, but the inherent risk of a short position can be mitigated significantly through the use of options.
  8. Difference Between Short Selling And Put Options

    Short selling and put options are used to speculate on a potential decline in a security or index or hedge downside risk in a portfolio or stock.
  9. Investing

    The Truth About Naked Short Selling: Commentary

    The media demonizes naked short selling, but it usually occurs after a collapse, not before.
  10. Financial Advisor

    What Is A Short ETF?

    A short ETF will be profitable if the underlying index or asset declines in price, and will incur a loss if the underlying index or asset gains in price.
RELATED TERMS
  1. Short Covering

    Short covering is buying back borrowed securities in order to ...
  2. Weak Shorts

    Weak shorts refer to traders or investors who hold a short position ...
  3. Net Short

    Net short is a portfolio or trading position leveraged to an ...
  4. Buy To Close

    Buying to close involves purchasing an offsetting position to ...
  5. Short (or Short Position)

    Short or shorting is selling first and buying later, with the ...
  6. Short Squeeze

    A short squeeze is when a heavily shorted security moves sharply ...
Trading Center