Short selling a stock means creating an open position in the market by buying the shares that you don’t own and then selling them to another investor. Investors opt for selling short if he/she feels that share price is going to decline. This technique is useful to earn profits when the share values go down.
In this, the investor usually borrows security or shares from the broker or a person who owns such shares. The investor will then sell these shares in the open market and retain the proceeds from the sale. The investor then anticipates that the prices will fall over a period of time, which will give him an opportunity to buy back the shares at lower prices. The difference in the selling and buying back price would be the profit of the investor.
Why is Short Selling Used By Investors?
This technique is used by investors for the purpose of hedging and speculation. Speculators use this technique to gain from the declining levels of stocks, whereas hedgers use this technique to migrate from the losses that can be caused in the market. Short selling is also used by institutional investors for both hedging and investment.
This technique is very beneficial in the bullish market but at the same time, it involves a high amount of risk. We, therefore, recommend you to have sound knowledge of the market and get daily stock picks. This research can help you to speculate the opportunities for short selling in the market.
When Should You Short Sell the Securities?
The short-selling technique is highly risky and is not recommended nor is it used by the majority of investors in the market. This is due to the fact that investors prefer to invest in rising stocks when the market is bearish. This is when they anticipate good returns. Investors who are ready to speculate opt for short selling in the bearish market when they anticipate that the prices will rise again in near future.
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