Short selling

An investor who expects the price of a security to fall may exploit this to make a profit by selling shares that they do not actually own with the intention of buying them back at a lower price to settle the trade.

It is important to note that this is not the only way of holding a short position.

Originally short selling could be done simply by offering securities for sale and buying them before delivery was due. Modern automated trading systems make this more difficult (as they usually check ownership of shares before accepting orders).

It is now usual to borrow shares from an existing share holder (who will charge a fee for doing this), sell these in the market, and buy replacement shares when the borrowed shares are due to be returned.

Copyright © 2005-2016