The concept of short selling can be related to the sale of shares that the stakeholder does not own. The main purpose behind this is to obtain a profit from any kind of future decline in the rate of stock.
- The shareholder involved in selling short or also referred to as a short-seller expects to buy back the stock from the respective market at a relatively lower value than the stock was really sold short.
- The idea of short selling is simple, but the investors always misunderstand the concept. Basically, people think of financially getting an asset and hold it for a while so that it gradually appreciates in value and finally sell it to make a pretty good profit.
In contrast to this, the short selling comes with the notion of making money only when a shorted security falls in value or say more precisely, a short sale includes the sale of a security type that never belongs to the seller but is promised to be delivered by the same.
- Working in detail: The nominee would borrow a stock from another nominee by a help of a broker. He further takes it to the market and sells it while keeping the records of sale proceeds with broker and that too in the brokerage account. Then, when the initial price of the stock falls, the investor or nominee buys the shares from the market and thereby replaces the shares borrowed from the market and finally closes out that short position.
- An investor must primarily deposit some amount of money with the broker, called as the margin. This amount is in the account of the short-sale in the event the investor makes losses and get tied up in a situation where he is unable to return the shares to the respective lender.
Generally, the margin requirement can be further divided into two main types. One is the initial margin requirement which represents the percentage of share value that must be strictly deposited with the broker at the initial stage of Bitcoin Code trading. Further hand, the second type involves the maintenance margin which indicates the whole total percentage of the market value of those shares that is always apprehended as the margin at any period after the prime step of trading.
Even though this facility of short selling seems to be made available with a limited number of open Stock markets, it was greatly advantageous to the real shareholders.