wht is shorting ? example with example
Answers
In finance, being short in an asset means investing in such a way that the investor will profit if the value of the asset falls. This is the opposite of a more conventional "long" position, where the investor will profit if the value of the asset rises.
There are a number of ways of achieving a short position. The most fundamental method is so-called "physical" short-selling, which involves borrowing assets (often securities such as shares or bonds) and selling them. The investor will later purchase the same number of the same type of securities in order to return them to the lender. If the price has fallen between the time of the initial sale and the time the equivalent securities are repurchased, the investor will have made a profit equal to the difference. Conversely, if the price has risen then the investor will bear a loss. The short seller must usually pay a fee to borrow the securities (charged at a particular rate over time, similar to an interest payment), and reimburse the lender for cash returns the lender would have received had the securities not been loaned out, such as any dividends that would have been payable to the lender if they were still the holder of shares that they had lent out.
Short positions can also be achieved through futures, forwards or options, where the investor can assume an obligation or a right to sell an asset at a future date at a price that is fixed at the time the contract is created. If the price of the asset falls below the agreed price, then the asset can be bought at the lower price before immediately being sold at the higher price specified in the forward or option contract. A short position can also be achieved through certain types of swap, such as contracts for differences. These are agreements between two parties to pay each other the difference if the price of an asset rises or falls, under which the party that will benefit if the price falls will have a short position.
Because a short seller can incur a liability to the lender if the price rises, and because it normally does the short sale through a broker, a short seller is typically required to post margin to its broker as collateral to ensure that any such liabilities can be met, and to post additional margin if losses begin to accrue. For analogous reasons, short positions in derivatives also usually involve the posting of margin with the counter party. Any failure to post margin promptly would prompt the broker or counter party to close the position.
Short selling is nearly always undertaken only in public securities, futures or currency markets that are fungible and reasonably liquid.
A short sale may have a variety of objectives. Speculators may sell short hoping to realize a profit on an instrument that appears overvalued, just as long investors or speculators hope to profit from a rise in the price of an instrument that appears undervalued. Alternatively, traders or fund managers may use offsetting short positions to hedge certain risks that exist in a long position or a portfolio.
Research indicates that banning short selling is ineffective and has negative effects on markets. Nevertheless short selling is subject to criticism and periodically faces hostility from society and policymakers.