Short Position - Short

What Is Short Position

A short position, sometimes simply called a short, is a strategy used by some investors if they anticipate lower prices. It’s considered bearish.

An investor who takes a short position sells an asset to another party--without owning it-- expecting to buy it back at a later time when prices are lower. The profit from the position is the difference between the price it was sold and the price at which it was bought back.

In contrast, a long position, also known as ‘long' occurs when an investor buys an asset holds on to it for a period of time and sells it later.

If the price of the asset rises and the investor chooses to exit at a higher price, the position ends with a loss. The risk of a short position is theoretically unlimited because prices can rise indefinitely. However, the reward of a short position is limited to the sale price.

Mechanics of a Short Position

The particulars of a short position on an asset that needs immediate delivery, like a stock, require that the short seller borrow the asset for delivery to the buyer. For selling stocks short, brokers often make shares available via loans to margin accounts that are approved for short sales. Margin accounts require collateral, and fees and interest may be charged.

Brokers sometimes lend shares they own to short sellers, but often brokers have arrangements with third-party stock lenders, such as pension funds, mutual funds, and other large owners of stock.

Once the short seller determines that shares are available through the broker, the short seller can sell the stock to a buyer, who receives shares from the broker. The buyer walks away from the transaction with the shares of stock purchased, but the short seller must now replace the borrowed shares by purchasing them on the open market.

The short seller expects to be able to buy the shares at a lower price in the future, but whichever direction prices move, he must eventually buy shares to replace those borrowed through the broker. When the short seller closes the position—whether at a lower or higher price--the loaned shares are replaced and the seller realizes the gains or losses of the short position, minus any fees or interest owed to the broker for the loan.

Shorting in Practice

For example, stock XYZ is trading at a price of $100 and investor AAA expects the price to fall to $90. Investor AAA borrows one share of XYZ from his broker and sells it to investor BBB. The following week, the price of XYZ falls to $90 and AAA buys it, for a profit of $10. The XYZ share purchased by AAA is delivered to the broker to replace the loaned share, and AAA pays any fees or interest charged for the loan.

The mechanics of a short position on a futures or options contract are less complicated because the contract is an agreement for delivery at a future date. Thus, a short seller does not need to borrow an asset before selling it if the position is not maintained through the expiration date. However, if an investor is short after expiration, he must buy the asset on the open spot market for immediate delivery.

For example, in July, the September expiration contract of commodity MNO is trading at a price of $100. An investor believes that the price of the contract will fall to $90 before the contract expires in September. She sells the contract short, but she is not required to deliver commodity MNO until September. In August, she buys one contract at $90 to cover her short position, which produces a profit of $10. Her position is now flat, not short or long, and she is not under contract to deliver or take delivery of commodity MNO.

Finding Information About Short Trading On Investing.com

Buying and selling strategies are sometimes discussed in the Analysis and Opinion pages of Investing.com. Although analysts do not specifically recommend taking short positions, the short side of the market is considered. When analysts expect that the value of an asset will fall, short strategies are favored.

Investing.com also maintains a social trading community that tracks live and demo accounts, including a leaderboard and other detailed tables of trading activity. Using these accounts allows users to explore short positions without committing personal capital.