Short position, which may otherwise be referred to as short, refers to the condition present when an owner of an asset expects its price to fall. In stocks, an investor in a short position would have sold borrowed shares, only to repay what has been borrowed with shares that would have been bought later on, after the price has dropped.
It is in this way that the investor can make a profit. Of course, there is also a risk that the assets will not lose their value, and instead become more valuable. In such an event, the short seller incurs losses.
For futures contracts, on the other hand, having a short position means that one has to sell a specified amount of goods at a pre-determined price.
Short selling is the exact opposite of long selling, otherwise known as “going long.” This is considered a more conventional approach. Long sellers believe that an asset is undervalued, and predict that it will eventually become more valuable. They take advantage of the low price and make their purchase, and then later on benefit from any increases in the asset’s price.
Short selling may be viewed as being particularly risky, as there is no limit to the amount of loss an investor can incur. It is doubly important that the short seller monitors developments in the asset closely. In any case, the usual practice is for the broker to inform the short seller in the event of a price increase. The short seller will then have to buy the security to put a stop to further loss.
