Short selling is when we sell a financial asset with the hope of buying it back at a cheaper price.📈
The short seller hopes prices will fall so they can make some profit.
But how does short selling work?😳
A short seller borrows assets from a broker and agrees to return them on a specific date.
The short seller then sells the stock on the market e.g 1000 units for £5 =£5,000
On or before the agreed date the short seller will repurchase the 1000 units (hopefully at a cheaper price e.g £2 so 1000 x 2= £2,000
The short seller will then return the 1000 units to the broker on the agreed date.
By doing this the short seller has made £3,000.🔥
Cons of Short selling
Short selling is kind of dangerous as your losses can be unlimited if prices rise. You will always need to return the total amount of stocks or units you borrowed regardless of their price.