What is Shorting Stock

Shorting of stock means to sell the shares for saving from loss and getting speculative profit.

I try to simplified it. Suppose, you are a broker. You are thinking that in the future price of XYZ Ltd. shares will increase. You borrowed the shares from a person whose price was $ 100, suppose, you borrowed one share. Now, when you estimate that its price will decrease, you will sell at $ 100 before decreasing the price. Suppose, tomorrow prices of XYZ Ltd. decreases and you buy same share at $ 60. Now, you have gained $ 40. After this you returned same share to the person from where you borrowed. You paid lending fees just $ 5 dollar. Now, your net profit from this shorting of share is $ 35.

Loss-making Shorting of Stock 

If the price of XYZ Ltd increases and you buy same share at $ 140. At that time, when you will return this share, you will face total loss $ 40 +$ 5 = $ 45 in this deal. So, this may be your loss making shorting of stock.

Mechanism of Shorting Stock 

From Above explanation, we learned that main aim of shorting of stock is to sell the stock at higher price and then repurchase at low price. But in real sense, prices of stock are affected from lots of factors. So, shorting of stock may be profitable or loss suffering. Following graph will represent the mechanism of shorting of stock.

In above graph, we see when the price of XYZ shares is $ 250 at that time, broker borrow and sell same price on fifth day. If he buy same share on 8th day at $ 150, he will get profit from short selling $ 100. If he buy same shares on 12th day, he may suffer loss of $ 100. This loss or profit may be increased due to changing the price of XYZ co. Ltd or changing the date of buying.







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Accounting Education: What is Shorting Stock
What is Shorting Stock
Accounting Education
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