Short selling



Buying low and selling high has always been the primary objective of investors, but most of the time they end up doing the reverse by buying high and selling low. The market in general, trends in an upward direction, so buying a stock cheap and selling it higher would be the obvious thing to do. A growing economy would always equate to an increasing revenue for businesses so as their stock prices. On an uptrend market, stock prices steadily increase as long as their underlying company's profits hit the mark towards growth. Market directions are fueled by what is going on in the minds of investors. It is a common saying that reputation takes time to build but only seconds to destroy. Same thing happens to investors' confidence towards a company on their radar. It takes time for a stock to reach a mark but when bad fundamentals hit the company even just a small hint of it would cause the price to fall faster than it did rose to its previous price. In this scenario, an investor could profit from the decline by shorting the stock. When you buy a security and selling it higher, you are trading a long position, hoping the price would increase at a later date. When we see that a stock is overpriced for its current fundamentals and expect the price to drop at a later date, we assume a short position. Its like riding a time machine and jumping right at selling a stock at a high price without first buying it at a cheaper price and you don't even own the stock you're selling.





Shorting is done by borrowing a stock from someone and immediately selling it at the current price. When the price drops, those borrowed shares are purchased at a lower price and finally returning it to whoever owns it. For example, you're shorting Archer broadcast company (ABC) and you borrowed 1 share of its stock from your sister. You sold that single share of Archer broadcast company as soon as you got a hold of it and got $10 from the sale. Three months had passed, the price of ABC fell to $5 a share, since you owe 1 share from your sister and sold it, you need to give it back. You then bought 1 share of Archer broadcast company at $5 and finally, you returned that single share to your sister, therefore you profited $5 from that activity since its cheaper to replace the share you borrowed and sold. But if the price of ABC never fell and instead rose to $15, it takes an extra $5 out of your pocket to replace that single share you owe. Selling shares applies downward pressure on the stock, shorting can only be done when the stock is on an up tick meaning when the stock is trending up to prevent the share price to fall further. However, a stock that is constantly being shorted through time would definitely cause it to drop in value. That up tick rule by the SEC only prevents it from falling faster say, in a single day.

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