All About Short Selling - A detailed report

Short selling is a type of investing in the stocks where the investors buy them just for a short period because they are not too sure about the company’s performance.

When an investor buys stocks of a company, then he is buying a part of ownership of the company. A stockbroker carries forward the activity of buying and selling of the stocks. The investors can buy or sell stocks from the installment loan company as well. People generally prefer to buy or sell the stocks with the help of the brokers who are a mediator between the seller and the investor. These brokers usually charge some amount of fees for the services they provide. When you get a broker to do the stock transaction, then you are supposed to open up an account that is either a margin account or a cash account. In the cash account, one has to pay for the stock when the purchase of the stock is made. On the other hand, when one opens a margin account, the stockholder gets a portion of the funds of the stocks when they are purchased and the security amount deposited is termed as collateral.

The stocks are bought for a long period of time when the investors have a trust on the company and expect the price of the stocks to rise at a great degree. On the other hand, the stocks are bought for a short span of time when the investors are not very sure about the company’s performance and expect the value of the stock to go down soon. A short sale is selling a stock that is not owned by the seller.

When one gets a short sale, then it is just like borrowing a stock. This stock is lent by the broker from his own inventory that comes from the customer of any other firm or a brokerage firm. The stocks are then credited to the account of the investor and the stocks can be closed whenever the investor wants. This is called covering the stocks and then returning them back to the broker. The investors can buy the stocks back when the value of the stocks falls and can make profit on the difference between the two values. When the investor buys the stocks when the price rises, then they are at a loss.

The investors can hold the short sale of the stock for as long as they want but the longer they keep it, the higher cost their will have to pay for the same. The interest is charged on the margin accounts and this is the reason the rates are the higher on keeping the short sale for a long time. In case the lender of the stock wants it back, you will have to cover it against your will. Since you cannot keep the share that is being asked for by the lender, then you can either buy another share or give the one up. When the shares are asked back, it is termed as “Called away.” Calling away the shares is rare but happens when then many investors short sell the security.

When you give the stock back to the lender, the dividends, and rights received is also given back to the lender. In case the shares split during the time you hold the shares, then you will end up owing double of the shares at half price.

Speculating

When the investors keep a check on the market and study it closely so that they invest in the stocks that give them the maximum returns is speculating the stocks. It is generally done when the stocks in which the investor is planning to invest involves heavy risk. Speculation is seen in a negative sense because it is termed equivalent to gambling as it involves calculating assessments and the stocks are bought in which the risk happen to be in the favor of the investor. The risk is assumed in this type and then the stocks are bought.

In case the investor follows the wrong strategy and invests in the stocks, they might even face heavy losses in their investments. The rewards on the other hand are also high and one can earn an unexpectedly high amount just by speculating. The trading volume of the market is also increased with this as high risks are taken and the liquidity flow is high in the market.