Short Position

In finance, a short position is a an investment which profits from declines in the value of an asset, rather than from increases in value.

Short positions are taken by short-sellers, which aim to profit from decreases in market rates.

Short positions are normally accomplished by borrowing assets (shares, for example), and then selling them at the going rate. The borrower (short seller) then buys the assets back at the lower rate and returns them to the lender.

The difference between the higher price at which they sell the assets and the lower price at which they buy back the assets to return them to the lender – minus interest paid on the loan – makes up the profit .

Example:

A stock trader has reason to believe that the value of a company's stock will decrease significantly within one month.

Based on this belief, they borrow 10,000 shares in that company's stock from a broker at the going rate of 50 centimes per share and sells them at the going rate for a total of 5000 francs.

Over the course of the month, the value of the stock plunges to 40 centimes per share. The trader buys back the 10,000 shares for 4000 francs at the going rate and returns them to the lender, pocketing the 1000-franc difference (minus interest on the borrowed shares).

If, on the other hand, the value of the stock increased to 60 centimes per share instead, the situation would be very different. The short seller would have to either continue paying interest on the loan and hope that the price comes down (assuming the loan is open-ended), or buy back the shares at the higher price (6000 francs) in order to return them to the lender – making a 1000-franc loss.

See also: Long position

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