Understanding Short Selling
Shorting a stock is a trading strategy where an investor borrows shares of a stock from a broker and sells them on the open market, with the expectation that the stock price will fall. The investor then buys back the shares at a lower price, returns them to the broker, and makes a profit on the difference.
How Shorting Works
When an investor shorts a stock, they sell high and buy low. For example, if an investor shorts 100 shares of Company X at $50 per share, and the stock price drops to $40 per share, the investor can buy back the 100 shares at the lower price and return them to the broker, pocketing the $10 per share difference.
Risks and Rewards of Short Selling
Short selling can be profitable if the stock price drops as anticipated. However, it can also be risky, as there is no limit to how high a stock price can rise. If the stock price increases instead of falling, the investor may have to buy back the shares at a higher price, resulting in a loss.
Examples of Short Selling
- One famous example of short selling is George Soros’ bet against the British pound in 1992, known as Black Wednesday. Soros shorted the pound, leading to its devaluation and earning him over $1 billion in profits.
- In 2008, hedge funds such as Citadel and SAC Capital Advisors made significant profits by shorting subprime mortgage-backed securities, which led to the collapse of the housing market.
Statistics on Short Selling
According to a report by S3 Partners, short sellers made $1.5 billion in profits on Tesla’s stock in 2020 alone. Short interest in Tesla reached a record high of 18.2% of the company’s float in May 2020.
