Short selling is an investment term and an operating mode of financial assets. As opposed to going long, shorting is to first borrow the underlying asset, then sell it to obtain cash. After a period of time, the cash is spent to buy the underlying asset and return it. Common functions of short selling include speculation, financing, and hedging. Among them, short speculation refers to the expectation that the market will fall in the future, then sell high and buy low, sell the borrowed stocks at the current price, buy them back after the market falls, and then return them to obtain a profit from the price difference. Its trading behavior is characterized by selling first and then buying. In fact, it is a bit like the credit transaction model in business. This model can make a profit in the wave of falling prices, that is, first borrow goods at a high level, sell them, and then buy them back after the price drops.

Generally speaking, if an investor wants to short-sell a security, he or she needs to arrange to borrow the security for settlement. Investors are required to deposit sufficient margin as collateral and are required to pay interest to the lender, which is payable to the lender when dividends are received. Lenders who lend shares lose their voting rights. In the past, stocks were lent out in large quantities during the privatization process, and short-sellers sent people to influence the voting of privatized shareholders, resulting in the failure of the privatization and large losses for the original shareholders. Therefore, many companies that are proposed to be privatized will recommend that shareholders take back the lent shares.

Extended information:

Principle and function

Short selling is usually an operation when predicting that the market will fall, and borrowing money from securities firms when the security price is high The securities are then sold, and when the price of the securities is lower, the securities are bought back from the market and returned to the brokerage, earning the price difference. However, if the market price rises instead of falling, more money will be spent to repurchase the securities to be returned, resulting in losses. In traditional securities markets, only investors will make profits when the market goes up. Short selling is a special operation method that allows investors to make profits when the market goes down. If the market falls as expected, you can earn the price difference when you cover it at a low price. If the market does not fall but rises, there is no theoretical limit to the price increase, and heavy losses will be incurred when covering up. Therefore, the risk is high and the speculation is high. Because of its highly speculative nature, not every stock exchange allows short selling; even if it is allowed, there are often more restrictions.

Short-selling gives people the negative impression of "profiting from other people's losses" because it profits from market declines. However, short-selling assets such as stocks still has a positive meaning, which helps to detect business fraud early. Exaggerated companies can bring excessively high market prices back to reasonable levels faster, and can also recover the wealth evaporated due to the bursting of bubbles.

Reference materials:

Short selling - Baidu Encyclopedia