How Short Selling Works and How to Take Advantage of It (Part 1)

Everyone understands how to make money on a price rise. A trader buys a currency when he expects it to rise, and sells it as soon as it reaches a potential peak. Such trades in trading are called longs or long positions. But as paradoxical as it may sound, you can make money on the falling price of an asset. Such transactions are called shorts or short positions. Shorts on the stock exchange can be opened with any asset, whether it is currency or stock. This type of trading is highly profitable but also carries a high level of risk. Let us discuss in more detail how to open a dollar short and make a profit.

What is a short position?

Tens of thousands of successful traders use short positions on Forex, but it is easier to explain the principle of a short position on the example of stocks. Let's assume that the trader has analyzed the market and he is sure that the IBM stock will fall by the evening. He can make money on this as follows. The trader borrows 100 shares of IBM stock from his broker and immediately sells them at the current price of, say, $150 per share. In the evening, the price of the stock drops to $120, and the trader buys 100 shares and pays back the debt to his broker.

How much will he earn by shorting the stock? 100x150=$15,000 - the amount he sold the stock for. 100x120=12,000 - this is the amount he later bought the stock to pay back. 15000-12000=3000 - the trader's earnings (minus commission for the transaction). This is a very simple mechanism, in the same way, you can short dollars or other currencies in order to first sell the borrowed funds, and then buy them when the price falls and return them to the broker.

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