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Short Position

A short position is a trading strategy where an investor borrows and sells a security they do not own, with the expectation that the price will fall. The goal is to repurchase the security at a lower price, return it to the lender, and pocket the difference. Short positions are commonly used in stock trading but can be applied to other assets like bonds or currencies. Short selling carries significant risks, as losses can be unlimited if the price of the security rises instead of falling.

Example

An investor shorts 100 shares of a stock at $50 each, anticipating the price will drop. If the stock falls to $40, they buy the shares back at the lower price, profiting from the $10 difference per share.

Key points

• Involves selling borrowed securities with the intention of buying them back at a lower price.

• Profits from a decline in the security’s price.

• Carries high risk if the price rises instead of falling.

Quick Answers to Curious Questions

They anticipate the stock’s price will decline, allowing them to profit from the price drop.

If the stock price rises, losses can be unlimited, as the investor must buy back the stock at a higher price.

Long positions benefit from price increases, while short positions profit from price declines but carry higher risks if the market moves against them.