Investing, as one of the most lucrative branches of business, isn’t always solely based on following stock and market movements. It is also important to known and use some strategy for investing, and one of the most popular is short-selling.
The first thing that you should know is that there are two major participant groups when it comes to investors. One is represented mostly by investing funds, and they are considered as “big time” investors, which means they are investing big amounts of money, and they own a big amount of stocks. On the other side there are small, individual investors, who mostly base their strategy on guessing and investing in the same way as the big ones. Both of those use different strategies, and short-selling is more common for big players.
What is short-selling?
Short-selling is practically a strategy where you are borrowing a stock from a broker and then you are trying to make a profit on it through time. More concretely, for example, if someone produces a pen on the market and it costs $100. You know that, after some time, its price will drop, because many others will start producing pen as well. So, you borrow a pen from a broker and tell him that you will give him $5 dollar for renting it. Then you sell it for $100. Next, you wait, and when its price drops, you buy it for that lesser price. After it, you return the pen to the broker and give him his $5. The rest of the money you keep for yourself. In this case, you are an investment fund, the pen is a stock, $5 dollar rent is interest, and the price difference is your profit.
When to use it?
One thing you should know is that short-selling is quite risky. If the price of the stock you are borrowing goes up, you can suffer serious losses, because you need to rebuy the stock that you sold, for bigger money. As it was said, this strategy is more common for a big player, however with most recent events with Gamestop stocks, we can see that small player can use it as well. You can find more about short-selling here.