STI: Er, what is short selling?

May 24, 2009

FINANCIAL QUOTIENT

Er, what is short selling?

 

Where do you see this?

 

In articles and books about stock markets.

 

What does it mean?

 

Short selling is a technique used by investors who hold the view that the price of a certain stock is about to dip and want to profit from the decline.

 

Remember the old adage of buying low and selling high?

 

It works when the market is going up. Short selling comes in when the reverse happens, that is, people want to profit from a market going down.

 

Short selling is done with the intent of later buying the stock or the financial instrument at a lower price. When investors sell something before they even own it, they are shorting the stock.

 

Why is it important?

 

It is a stock market strategy typically applied by savvy investors and it can be very risky.

 

In some cases, the short seller 'borrows' or 'rents' the stocks to be sold, and later repurchases identical stocks to return to the lender. If the stock price falls, the short seller profits from having sold the borrowed stocks for more than he pays for them later. But if the stock price rises, the short seller loses by having sold them for less than the price at which he later has to buy them. The strategy is risky as prices may rise rapidly, resulting in the investor having to cough up a lot of money to repurchase the stocks at high prices.

 

So you want to use the term. Just say...

 

'I decided to short sell stock ABC as I think its price will dip soon.'

 

Lorna Tan