Short selling is simply selling borrowed security in order to buy it back when price declines. It actually not the ideal strategy to be applied by novice investors due to the big risks of loss. Regardless if you are into traditional trading or into crypto trading, it is not a very wise move. If you do insist, it is best that you read some Bitcoin exchange reviews to see how you can really take advantage of it.
But how it Works?
Inflation is one of the contributing factors for short-selling. Traders are buying securities similar to stock either though a stockbroker or a company. Most of the traders are using services of experienced brokers and opening trading account like cash or margin account. Going short means selling futures or security contract or even writing option believing that the price is going to decline.
On the same note, going long is about buying a security that’s expected to increase in its pricing. The trader does not own any security instead, it is borrowed from the stock broker. The trader is going to buy the same volume of stocks so they can close short and then, return it to their brokerage firm. Traders are buying back securities after the decline of a price and make a profit out of it. The opposite thing happens though when price is going up as that is when they lose money.
Benefits of Short Selling and why it should be Considered?
There are various reasons for a trader to sell short and among it is to protect their portfolio or investment instruments. Traders are opting to sell short when they have plenty of long positions. This is a way of hedging risks.
Another common reason is by making money during bearish market when the stock’s value is expected to fall. One concern with this form of trading strategy is that, there are a lot of risks associated to this. The price of the stock may keep going up and there’s no limitation to the loss. Yet another challenge is that, traders do owe dividends and rights that come with the stock. This is basically how stockbrokers are benefiting from it. So as much as possible, do in-depth research about dividends that your chosen stock pays.
Profiting from Short Selling
Needless to say, the end goal is to generate profits from short selling. One way of doing this is by using negative return momentum. Whether you’ll make money or not entirely lies on the market conditions. Regardless if it is in a down or up market, you should always find opportunities as well as ways of minimizing risks and maximizing profits.