SHORT SELLING; WHAT IS SHORT SELLING OF COMMODITIES?

Short selling of shares is a situation where a seller of stock sells stock that does not belong to him or her. This situation is fairly common in the stock market where a party to stock trading transaction borrows stock from a broker and sells it to a buyer at a higher price hoping that the stock price will fall to enable him to buy back the stock and repay the lender of same. This is sometimes used figuratively to mean one placing his belongings where he or she cannot easily get it back when the need arise.

SHORT SELLING WORKS IN TWO WAYS:

One, you can make a lot of money from it. Yes, short selling can make you a lot of money when you predict right. Imagine how much you stand to gain when you borrow stock that sells at $50 from a stockbroker and sell at the same price only for the stock to fall to around $20 in about two months time. Again, suppose that you were able to borrow up to 10,000 units of such stock. I will leave you to do the mathematics. The profits you make from this can change your car and wardrobe.

Two, you can go bankrupt by this singular act. The exact opposite of what happened above will happen here if it backfires.

Short selling still gains ground in the heart of many in the financial market today despite the highly levered nature of short selling. A lot of people compare short selling with margin trading as they both involve the use of other people’s money to trade the commodity, currency or stock market.

This comparison is not a fair one as one is more risky than the other. The risk of margin trading is cushioned by the ‘stop’ function that is built into many trading platforms that exist today. The stop function allows you to fix a limit to the amount you are willing to stake (expose) in any given trade. Short selling does not give this kind of opportunity to take losses at a certain level. I will leave you to do the comparison yourself.

I only use short selling when I have done my technical and fundamental analysis properly. It is not wise to trade the market sentimentally talk more of doing so when you are shorting. Avoid short selling of stocks if you don’t have reliable financial cushion.