Definition of Short (Finance)
In the field of finance, short or short selling (or short position) is depicted as the practice which sells securities or other financial instruments that have no current owner, and simultaneously repurchasing them, when the price of those items goes down the short will make profits, because the price of repurchase will be less as the proceeds which were received upon the initial (short) sale, but the possibilities is there that the short seller will run on loss the item prices rise before repurchasing.
In other words, short selling is defined by the action of selling with expectation of borrowed security; commodity or currency will fall in value, so that short seller will acquire the profits by repurchasing them. The theory of short selling is that the security will decline over a time period, with the speculation of hedging the downside risk of a long position.
Books on Short (Finance)
A Short History of Financial Euphoria By John Kenneth Galbraith (published by Penguin, 1994)
Finance and Accounting for Nonfinancial Managers: All the Basics You Need to Know By William G. Droms, Jay O. Wright (published by Basic Books, 2010).
How Short (Finance) works?
Here two of practical examples with the idea of Short (finance) can be accumulated easily; two examples are discussed below,
- Suppose a trader estimated that the shock ABC worth of $50 will decline in price, so eventually he borrows 100 shares of this stock and sells them. This is a ‘short’ position where the trader sells something that he did not own in the first place. After a week, stock ABC reported to be declined to $45, so the trader decided to call the short position to replace the borrowed shares, his profits will be counted excluding the commission of commissions and interest on the margin account – is, therefore, $500.
- Let’s say the trader did not close the short position at this time and waited for further decline in stock prices, suppose the rival company wanted to grab the opportunity to have stock ABC at $65 per share, and if the trader decided to close the short position he will be running on loss of $15 per share or $1,500 because the shares are brought back comparatively higher price.
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