Find out how Short Selling works in the stock market and how to apply it to your investment list.
When you buy something you're interested in, it's common to expect that it will go through a period of depreciation and loss of value. When you buy a car, for example, it's certain that as soon as it leaves the dealership it will automatically be devalued because it's no longer "zero kilometre".
In the financial market, this idea of appreciation and devaluation is a recurring one. But there is a way to make money and be profitable with the loss of value of assets, and this practice is called Short Selling.
Short selling is a unique strategy that allows investors to profit from the fall in value of assets, a practice that is the opposite of traditional buying. This approach, although complex, can be simplified by considering an analogy with buying and selling cars.
Imagine you want to buy a blue VW Beetle for 10,000 reais, but you can't find it. So you hire someone to pick up the car and, if the price is less than 10,000, you buy it and profit from the difference; if not, you take the loss. In this context, the investor represents the broker, and the executor of the strategy, the agent.
This practice is carried out on the stock market, where investors sell a share they don't own in the expectation that its value will fall.
This process involves two operations: renting the share and selling it, a transaction carried out by the broker in the same way as a purchase. It is essential to mention that some exceptions may occur, and it is advisable to check with your advisor before proceeding.
Stock traders use short selling on a daily basis, regardless of the strategy adopted. Whether for day trading, swing trading or buy and hold, investors need a solid reason to believe in the devaluation of an asset or company.
An emblematic example is the case of Kodak, a technology giant that failed to adapt to market changes and went into decline, resulting in bankruptcy.
This strategy exemplifies one of the advantages of the stock market: the possibility of making a profit regardless of the economic climate.
With an accurate reading of the market, investors can make substantial gains, whether buying or selling shares, showing the versatility and lucrative potential of this financial market.
General concepts of Short Selling
Definition: A strategy in which an investor sells assets they don't own, with the intention of repurchasing them at a lower price in the future.
Operation: The investor borrows the assets from a broker and sells them on the market. He then repurchases the assets at a lower price and returns them to the broker, profiting from the difference between the sale and repurchase prices.
Objective: Profiting from a fall in the price of the underlying asset. The strategy is based on the belief that the price of the asset will decrease after the sale.
Risks: Short selling is a high-risk strategy because the potential losses are theoretically unlimited. If the price of the asset rises after the sale, the investor will face significant losses.
Regulations and restrictions: In some markets and countries, short selling may be banned or restricted due to its potential to cause excessive volatility and price manipulation. Investors should be aware of local regulations and the risks involved before using this strategy.
Read more: What are stock brokers?
Attention!
Valor e Capital is a purely informative site aimed at enriching our users with financial content, we are not linked to any company and we do not make suggestions for buying or selling assets, do not share personal information in the comments.
