Selling Short is borrowing the security and selling it later on hoping that you can repay the share loans since you can buy it back later at a much cheaper price. Usually, traders in Forex trading and day trading like to buy low then selling it high. They prefer to buy a cheap position then selling it later when the price goes up. This strategy is considered as a good way to earn money. This is because, when the economy of the country grows even for a little bit, business grows and the stock prices as well.

But there are instances in which a country has a good economy but some securities still decline. This company can either be mismanaged or simply having a string of bad luck. During this situation, you cannot make a profit by buying low then selling it at a much higher price. Instead, you may opt-in selling short.

Selling Short is Easy

There are a lot of brokerage companies nowadays that allow you to sell short easily. If you are a day trader, you will just place an order stating that you will sell your stock. The broker will then ask you if you are selling the shares owned by you or just selling short. If you choose to sell short, the brokerage firm lets you borrow shares that you can sell then loans the shares directly into your trading account. After that, it executes a sell order.

Since you have sold your shares, you will now wait for the security to go down its price. Then you can buy back the shares at a much lower price. You can now return the shares to the brokerage in payment of the loan that you previously had. You can then keep the difference minus the interest

Choosing Shorts

Investors are people who are making careful research before opening a trade position which can last for years. Those investors working on the short price spend more time on market research, checking for companies that will likely go down in the future.

For day traders, they don’t really exert much effort on accounting and they also don’t have the time for those short to work according to their likes. Instead, they are looking for those stocks that are down because of ordinary reasons. Most of the time, day traders reverse their previous long strategy by selling short.

Risks of Selling Short

There are certain risks associated with shorting stocks and even in Forex Trading. There is no limit on how high the stocks can go therefore, there is also no limit on the amount of money the short seller can lose. Two traps can affect short sellers. The first thing is the short squeeze brought by good news and the second one is the concerted effort that basically hurts short traders.

For some reason, a lot of companies, investors, and brokers do not like short-sellers, prompting them to resort to bad tactics. There are times that they just issue some good news or even spread rumors that results in a squeeze.