What is a short position?
If the investor believes that a particular asset is likely to lose value, it can take a short position to this asset. This can be achieved by a brief sale of asset or writing the possibility on the asset. Short sale is the practice of lending asset, such as a number of shares, and then selling assets to someone else at the current price. If the stock price drops after the sale, the investor then buys the same number of shares at a lower price, returns the shares to the creditor and the pockets are the difference between higher and lower prices. Alternatively, an investor who owns an asset can conclude a contract with another party on the sale of these shares at a specified price on the future date, isolation of the owner from the loss.
For example, an investor may believe that shares prices for X Company will go down. It sets up a margin account with a brokerage company, an account that allows the investor to borrow purchase censolence with security acts as a collateral. The investor orders 100 shares of the company X shares for $ 50 in USD (USD) per share that afterHe sells it for this price. When the stock price drops to $ 35 per share, the investor buys 100 shares and returns them to brokerage.
by short sales, the investor in the example increased the value of the portfolio by almost $ 1,500. He sold the borrowed assets for $ 5,000 and covered the shares he owed, paying $ 3,500. The difference between the two amounts, minus interest on the margin account is its profit. A short blanket is a process of buying the same number of shares to return to a broker or creditor.
When the investor takes a short position, the mediation gets an asset from his own inventory, another brokerage or from one of the other customers. In most circumstances, the investor can keep the short open until he wants. In addition to increasing interest on margin account, the risk of maintaining a short open is that the creditor can at any time require the return of the borrowed asset. Broaching could be able to borrow additional shares, but ifHe cannot, the investor must cover immediately. This process is called the called away.
take a short position for speculative reasons brings significant risk. Short sales games about the value of asset over time. If the price rises instead, the losses can exceed the initial investment many times. In the above example, if the stock price increases to $ 75 per share from the initial $ 50 per share, the investor would lose $ 2,500 for an agreement. Most of the investor can get from a short position is 100 percent of the initial investment, but its losses can theoretically be unlimited.
If many investors take a short position for the same stock, if the price of the action is on the market, there may be massive rush on the short retailers market to cover their positions. Increased demand drives the price higher, which is an event known as a short grip. This may invite a shares creditor to call short retailers and require immediate purchase and return of shares. Short grip can result in a massive loss for short prodejce.