Anybody who is an investor or a trader knows that to make money in the market, you have to “buy low and sell high.” This is when you buy, for example, shares at a low price and sell them later at a higher price to get some profits. This is what we call as being LONG. In other words, you’re buying.
Being LONG is absolutely fine but how about when the market is trending down? How do you make money then? Aha! That’s when SHORT SELLING comes in.
Being SHORT simply means “Sell high now and buy low later.” If you are of the view that a company’s share price is about to fall, you decide to sell the shares now. All this without actually OWNING the shares. The principle is that when you want to SHORT sell, you actually BORROW the shares from somebody else and sell those shares. Yup, you’re selling somebody else’s shares. Of course, this will be carried out by your stockbrokers or CFD providers and not yourself. It would be funny knocking on people’s door wanting to borrow their shares… Anyway, after selling those shares, when the shares actually go down in value in the future, you buy them back and return those shares to the owners. Once again, all these are done by your stockbrokers/CFD providers. You just tell them that you want to SHORT SELL.
The price of Company A is at AUD10.00 now. The company just released bad financial results and you think that the share price is going to go down. You then SHORT SELL Company A. Then, about a month later, the price of the company’s share price did go down to AUD9.00. You then buy back the shares at that price. You have just made a AUD1.00 profit per share.
What are the risks? Of course, the risk is that if the share price actually goes up! In SHORT SELLING’s case, you want it to go down, not up! Taking above’s example, if the price goes up to AUD11.00, you have just made a loss of AUD1.00 per share.
In Australia, SHORT SELLING is readily available and can be executed by most stockbrokers and CFD providers. However, in Malaysia, I heard that it can’t be done yet.
To sum it up, SHORT SELLING is used when you want to make money while the market is trending downwards.