When a trader goes long on an investment, it means he has bought a stock/share considering its price will rise in the future. Conversely, when a trader goes short, he is anticipating a decrease in share/stock price.
Short selling simple means, selling of shares/stocks of the company before buying them i.e. selling shares of the company without having their ownership. When you short sell a stock, your broker will lend it to you. The stock will come from the brokerage’s firm. The shares are sold and the proceeds are credited to your account. Sooner you have to close your short position by buying back the same number of shares and returning them to your broker. If the price drops, you can buy back the stock at a lower price and make a profit on the difference. If the price of the stock rises, you have to buy it back at a higher price, and you lose money.
Why do Traders Short Sell in the Market?
Here are three key reasons for the traders to Short sell stocks in the market:
— To Speculate: This is one of the primary reasons why does one takes a short position in the market. If one is of the view that the strength in the market is about the fizzle out and we could see some correction or weakness in the market, they will short sell.
— To Hedge: Hedging as a strategy is of prominence in the capital market. If one is having a bullish view on the market over the long term but is expecting a small correction in the market on its way up, they might short sell. Here, traders short sell to play that short-term weakness in the market, one takes a short position in the market.