Keen on discovering some new ways to increase that bank account? Well, you might want to check out this interesting and useful technique then. Short-selling is the concept of making a profit off an asset by selling it and then repurchasing it when its value declines. This practice--also known as shorting--is quite commonly seen with stocks whose value are on a decline, or even in a bear market. 

Short-sellers deal with financial securities that are usually borrowed from a third party, such as brokers. In other words, it deals with the selling of an assest that the short-seller himself doesn't own, but one which he promises to deliver.

Depending on the agreed time frame, a short must be "closed" by buying back the same number of shares and returning them to the third party involved. This process is called "covering." If the value of the stock drops, the short-seller stands to make a profit. On the other hand, if it drops, the short-seller incurs a loss. 

Normally, a short can be held indefinitely however it will lead to an added interest being charged on margin accounts. As a result, it becomes very expensive to keep a short sale open for long periods. Also, at times, lenders might force a short-seller to cover sooner than expected if they want their stocks back. This is called 'getting called away.' It only happens if many investors are short-selling a particular asset or security; but this is extremely rare.

When done through a broker, there's a fee or commission involved for a short sale. All in all, There are many risks involved with short-selling, since this is a purely speculative method. However, if played correctly, the rewards of this game are also pretty high.


-Picture courtesy Thinkstock-

30 Second, guide, short-selling, finance, money

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