Why investors use short selling strategy? Is it beneficial?

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Short selling is a sell of a security that is not actually owned by the seller of that security, or that seller has borrowed from someone else. It is a strategy to sell a stock which you don't actually own. How can you do this? A stockbroker of a trader buys the stock then lends it to him, sells it, and credits the account and then the trader promises to buy the stock in the future to return the borrowed money. This is called covering the short. If a trader is confused regarding investment strategies then he can take suggestions from market experts, they provide stock tips, daily market follow-ups and market calls recommendations to provide investment guidance.

 

Basically, Short selling is a strategy used by people who are trying to get profit from the falling price of a stock. It is a very risky technique as it involves huge timing and it can also go contrary to the whole direction of the market. Since the stock market has historically tended to show sudden ups and downs continuously. It requires accurate market timing, perfect market opportunity, which is sometimes very difficult to find.

 

Benefit of short selling -

1. It provides protection in a bearish market - Short-selling provides a way to speculate if the investor of share market think that the market’s value is going to decline in future. This provides the benefit to adding money to the portfolio in a bear market. Without short-selling, it can be very difficult for the trader make money from a downbeat market.

Most of the times economic and financial events and other problems can lead to falling in the value of a company. Many short-sellers tend to look out for falling market movements hoping to make a profit as the price fell in the market.

 

2. To protect in any position – Suppose if a trader has various long-term positions, so they may choose to protect them with other short positions. This is called hedging. Hedging is different from speculation, it is a process of offsetting of price risk by taking an equal but opposite security in the future market.

 

Limitation of short selling-

1. Huge risk -

There is huge amount of loss in selling short. If you were for long-term, your maximum loss should be in control when the asset reached zero in value. You can consider adding a stop loss to your position to ensure that your maximum potential loss is protected.

 

2. Restrictions are also there – There are some restrictions in short selling like trading shares or futures, there may be possibilities that sometimes it is not possible to short sell, and regulators declare these shares unborrowable for economic reasons.

Just for the example, if most of the trade selling short of stocks from a certain sector, like banking, this would create impact on public as it suggests that traders think the share price is likely to decline sometime.

 

Trading strategies should be used very carefully as it gives both negative and positive results in future. For better outcome, a trader can refer stock trading recommendations, trading tips, binary option trading tips or any other for a better return.

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