Short selling allows an investor to bet on the price of an asset falling. The investor borrows an asset from a broker and sells it, with the intention of buying it back at a lower price later to return it to the broker and profit from the price decline. While short selling provides opportunities for profit from price declines, it also carries risks as losses are unlimited if the price rises significantly instead of falling as anticipated.

1. Short Selling
by fundsacademy.com

2. What is Short Selling?
• When an investor bets on the price of an asset
falling
• The opposite of buying shares or ‘going long’

3. What transactions are involved?
• Investor short sells an asset - To do this they
borrow the asset from a broker
• To close the position the investor buys the
asset (buy to cover) on the market at current
prices
• Investor returns the asset to the broker

4. Short selling transaction flow:

5. How is P&L calculated?
• An investor short sells shares, below are the
P&L outcomes when the position is closed:
• Price has risen – The trade makes a loss
• Price has fallen – The trade makes a profit

6. What are the reasons for short selling?
• Speculation: to gain exposure to risk
• Hedging: to reduce risk on existing long
positions

7. What risks are involved?
• Unlimited exposure: while long positions can
only fall to zero in theory the price an asset
can rise to is unlimited.

8. Now take a read of below article
before finally taking the quiz!
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