These shares are ones which are not owned by an investor. First thing that comes to your mind now will be: how you can trade shares which you do not own in your stocks portfolio. The answer is simple; these are the shares which are issued by your brokerage house against your investment in the form of collateral. Any one can short sell but remember you have to return these shares to your brokerage house by buying back these shares from market. Brokerage house will also take some money from you for the loan you took against collateral.
Now again another thought popping up in your mind would be why to take these shares against collateral if we have to return these share to brokerage house. The answer is simple, if you think the price of the stocks would come down in future and the stocks are over valued then you want to sell these stocks on higher price. So you immediately borrow these stocks from brokerage houses against collateral and sell them in the market at higher prices. When prices fall, you again buy these stocks from market and returned these lower priced stocks to brokerage house. Meanwhile, you earned handsome amount of money by higher selling price and lower buying price. This process of closing the short by paying back the shares to brokerage is known as Covering the short. This short selling investment can benefit those investors, who are smart enough to predict the fall of the price in market and make investments in short selling. Investor can own these shares as long as possible until market falls but he/she has to pay certain amount of interest. Another thing is that, during holding period if company announces any dividends then it goes to actual shareholder who actually owns these shares.
The downturn of market is a opportunity for those investors who can predict this downturn and make profit through short selling. Investor should also beware of the downfalls of the short selling, because it can also bring huge losses. Speculation is the threat which makes shorting a riskier option. But smart operators can handle this short selling and they know how to handle speculation as well.
by: Ayaz Haide
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