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Q&A - Short selling made simple

Short selling – please, please – in simple terms. I am new to the market and it’s a little complicated.

As you are new to the market, let’s break this seemingly simple term down so you can understand what is going on here.

You will often hear the term ‘short’ if dealing in the financial markets. This term relates to a person’s view on the market and is used by people who trade shares in the market rather than by mum and dads who are long-term investors.

Share traders take short-term views on the share market direction and the direction of particular stocks listed on the share market.

If a trader thinks the market is going to fall then they may ‘go short’ to take advantage of this fall. When you hear short, you can replace it with the term ‘sell’. I am sure you understand selling, and that is all shorting means. ‘Short’ is a trading term that means you have sold the asset rather than bought the asset. In fact, it can mean you actually sold something you never owned in the first place. If this were the case, then you would have been taking part in naked short selling. Naked short selling is actually as dangerous as it sounds. In this case, it means you have sold the asset but have never owned it so your loss is unlimited if the market rises because you will have to buy the asset back at some stage to close out your trading position. So, unless you got it right and the market fell, you could wait and wait and wait but if the stock keeps going up you will keep losing money.

So next time you hear someone say they have shorted BHP, you will know this means they have sold BHP hoping to make money when the stock falls.

If you want to get in on this terminology, the next time someone asks you about your portfolio, you could say you have gone long on BHP; this is the opposite of short and means you have bought BHP because you think it is going up in value.

For guidance you can trust, book a complimentary first appointment with Switzer Financial Services today. 

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

 

Published on: Monday, September 14, 2009

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