Polls / June 11, 2010

Do you know the difference between short and long selling of shares?

The difference between short and long selling of shares is known by only 36% of respondents to the latest eZonomics poll, while 64% of respondents are not so sure.

Short selling means selling what you don't have
While it might sound unusual, short selling often involves selling shares that are not actually owned by the seller. The Securities and Exchange Commission in the United States makes the point in its definition of short selling, saying it is "generally the sale of a stock you do not own".
Long selling, in contrast, is the selling of shares that are owned by the seller. It is what many people would traditionally think of as a trade.

Short selling can make a profit when share prices fall
An investor who has "gone short" makes a profit if the share price falls. That is because the investor can buy the shares in the future at a lower price. The difference between the lower price at which shares are bought the higher price at which they are sold constitutes a profit.
It is not only shares but also other financial instruments (such as bonds, currencies and commodities) that can be shorted.
But short selling is not universally accepted and governments and financial regulators are examining its impact on financial markets, with some taking steps to restrict it. A particular form of short selling - known as "naked" short selling - has come under more criticism as it is riskier and operates in a different way to regular short selling.

Short selling can be a risky business
Short selling is used by investors and institutions for a variety of reasons - with hedge funds, for example, often using short selling as part of a strategy to make money when it is believed an asset price will fall. It can be used purely for speculative purposes but also to protect the value of assets held in a portfolio.
But going short is particularly risky because investors can theoretically make unlimited losses. If share prices rise, short sellers will lose money. As share prices can theoretically rise to any level, short sellers can quickly find themselves making large losses.
In addition, broker fees apply and rise the longer the short position is held.
Short selling is usually done only by experienced investors with plentiful wealth to cover the potential losses.

InvestingShares

eZonomics team
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