What Is Short Selling? How to Earn in the Falling Stock Market?

2019/10/27

We associate stock market with profits only when it is rising. The general perception of the common man is that there is money to be made in the market only when the stocks are on an upward trend. But there are opportunities to make money even in a falling market. Let us analyze how.What Is Short Selling? How to Earn in the Falling Stock Market?

Professional traders use short selling as a tool to make money in a falling market. In fact they operate on the surmise that there is money to be made in the market which ever way it moves. So whether it is bullish, bearish, stagnant or going side ways, there is an opportunity waiting to be grabbed.

Short selling simply means selling something that you do not own. You can short sell a stock or a security if you think that the prices are going to fall in the near future, thus benefiting from the sale. It is a bearish stance and is the exact opposite of going long – which means buying low and selling high to make a profit.

There can be some confusion here in understanding the fact that you sell something that you do not own. Well, here it does not take the literal meaning of the word. In stock market terms, it means that you borrow the shares to sell at a high price without paying for it at that point in time. Later, when the prices drop as anticipated, you buy back the security to return the loaned shares to its owner.

The profit is earned by pocketing the difference between the price you sold the security and the price you brought the stock at. Short selling is not particular to stocks only. It can be also done in forex trading as well in commodity. The natural question that would arise in any body’s mind is why would a person loan out his/her securities for this? The principle that moves the stock market is what is applicable here. While you might think that a stock value is going to fall, the lender might have an opposite view.

Professionals use short selling as a tool to capitalize on rapidly falling stock. Potentially, it can also be used as an instrument to reduce risks to hedge losses on a portion of your portfolio.

What Is Short Selling? How to Earn in the Falling Stock Market? personal-finance

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