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Term of the day – SHORT SELLING

by | Aug 3, 2020

The most traditional way we trade and invest is buying (going long) a market.

This is where we buy a market at a low price and anticipate that the price will go up, where we will sell it at a higher price for a profit.

Short selling (or going short) is the opposite.

At the most basic level of understanding, it is where you make a prediction that the market will go down instead of up.

Let’s get into the MATI Trader term of the day:

What is short selling?

This is where you sell (go short) an underlying market at a high price, anticipate a drop in price where you’ll buy it back at a lower price for a profit.

How short selling works…

To understand this concept, I’m going to break it down into three explanations.

• One line
• Step by Step
• Visual

Explanation #1:
One line

Short selling is the practice of selling a financial market (such as a share, crypto currency, index etc…) that you don’t own with the intention of buying the same market back later on at a lower price for a profit.

Explanation #2:
Step-by-Step

1. You sell a number of shares, which you don’t own, at a higher price.

NOTE: You borrow the shares from a broker or lender.

2. After time passes, the market then comes down in price.

3. You then decide to buy back the shares and close your position for a profit.

NOTE: When you buy the position back, you automatically return the borrowed shares to the broker/lender and pay them a fee.

4. You will pocket the difference between the price from where you sold the shares and the price where you bought them back.

The Broker gets the shares back you get the profit – bada bing bada boom – DONE.

Explanation #3:
Visual

Hope you enjoyed the term of the day!

What term would you like me to explain in one sentence, step-by-step and visual next week?

Send me an email to Info@timonandmati.com.

Trade well and look after yourself,

 

 

Timon Rossolimos

Founder, MATI Trader