1) What is short selling
Short selling is when an investor - believing a stock is likely to fall in price - borrows stock from their broker and sells it in the market with the intention of buying it back at a lower price and delivering it back to the broker thus making a profit.
The profit from short selling is the difference between the higher sale price and lower purchase price.
The risk is that the stock price rises and the investor has to buy the stock back at a loss at the higher price. Margin is payable if the stock price rises above the short selling price. If you fail to maintain sufficient margin in your account, forced liquidation will occur whereby the broker buys the stock back at an unfavourable price.
The investor must have a margin account and is charged interest for borrowing the stock that they are short selling. They must also pay dividends due to the stock owner whose stock they have borrowed.
- Short selling is also known as shorting the stock.
- Borrowing stock is often referred to as stock borrow.
- A short squeeze occurs when brokers force liquidate many short positions driving prices higher.