Short selling

In finance, short selling (also known as shorting or going short) is the practice of selling securities or other financial instruments that are not currently owned (usually borrowed), and subsequently repurchasing them ("covering"). In the event of an interim price decline, the short seller profits, since the cost of (re)purchase is less than the proceeds received upon the initial (short) sale. Conversely, the short position closes out at a loss if the price of a shorted instrument rises prior to repurchase.

Potential loss on a short sale is theoretically unlimited, as there is no theoretical limit to a rise in the price of the instrument. However, in practice, the short seller is required to post margin or collateral to cover losses, and inability to do so in a timely way would cause its broker or counterparty to liquidate the position. In the securities markets, the seller generally must borrow the securities to effect delivery in the short sale. In some cases, the short seller must pay a fee to borrow the securities and must additionally reimburse the lender for cash returns the lender would have received had the securities not been loaned out.

Short selling is most commonly done with instruments traded in public securities, futures or currency markets, due to the liquidity and real-time price dissemination characteristic of such markets and because the instruments defined within each class are fungible.

In practical terms, "going short" can be considered the opposite of the conventional practice of "going long", whereby an investor profits from an increase in the price of the asset. Mathematically, the return from a short position is equivalent to that of owning (being "long") a negative amount of the instrument. (Nevertheless, one main discrepancy in the short against a long position is that the short position must exclude the dividends paid, if any.)

A short sale may have a variety of objectives. Speculators may sell short hoping to realize a profit on an instrument that appears overvalued, just as long investors or speculators hope to profit from a rise in the price of an instrument that appears undervalued. Traders or fund managers may hedge a long position or a portfolio through one or more short positions.

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Wikipedia