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What is Short Selling?

Short Selling is a trading strategy where you intend to profit from a decline in an asset's price. With other words, Shorting in stock trading is when a trader borrows shares and sells them, in hope of profit from the drop of the price, to buy them back for cheaper. Your plan is clear; you want to harness the potential of stock's decline, and rake in profit after repaying the initial loan.

Because you're borrowing shares from your online stock broker, you must first open a margin account to hold eligible stocks. On a side note not very stock is shortable. Online trading platforms indicate when stocks are available for shorts. Similarly to other forms of borrowing, you will have to pay interest on the value of the outstanding shares until they are returned.

Interest rates do vary to large extent. Often you may go short the most liquid stocks for coins, whereas the less liquid shares could come with extremely high interest rate that may reach 100% annualized. Interest rates are calculated daily at the current rates, and are deducted from your stock trading account on a monthly basis. Good news, the interest may be eligible to tax-deduction.

When your margin account is all set and funded, you can start picking Day Trade stocks. Stock investors including Day Traders who are often engaged in Short Selling deploy a wide array of trading tools such as fundamental analysis, stock technical analysis or market research to stumble across potential Shortable stock candidates for their daily portfolio. Once you have a Short Position in a stock, you expect to see the price fall and exit the trade when stock's price rises, dependent on your trading strategy.

In general you can hold a Short Position for as long as you want but under special circumstances you can be forced to cover your short, if the lender wants back the stock you borrowed. By logics, your broker is unable to sell what they don't possess accordingly you have to borrow other shares if available in the market, or you'll need to cover. Though this is rare occurrence has been renowned as 'called away' it is worth know.

Short Selling can deliver trained investors a profit - ranging from tiny to enormous - depending on trader's aptitude to anticipate coming price movements, and on the trading strategy they are adamant to, but it's imperative to be aware, Shorting involves high risk. Despite its popularity amongst Day Traders, Unseasoned investors more often than not find that Short Selling can impede their success rate's elevation.

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