Shorting in the stock market is a common practice employed by investors to profit from a decline in the price of a particular asset. Let’s illustrate this concept with a simple example. Suppose you decide to short-sell 10 shares of a company. First, you borrow these shares from your broker, promising to return them at a later date. Next, you immediately sell these borrowed shares on the market for $10 each, thereby collecting $100 in total.
Now, let’s fast forward, and the price of the shares indeed drops as anticipated, falling to $5 each. At this point, you decide to close out your short position. To do this, you use the $100 you collected earlier to repurchase the 10 shares at the current lower price. Since each share is now only $5, you spend $50 to buy back all 10 shares. Finally, you return these shares to your broker.
In summary, by shorting the shares initially at $10 and then repurchasing them at $5, you’ve effectively profited $50 ($100 – $50) from the price decline. This is how short-selling works in practice, allowing investors to capitalize on downward movements in asset prices.
(Response: Shorting, or short-selling, is a strategy where an investor borrows an asset, sells it on the market, and then buys it back later at a lower price to return it to the lender. In the provided example, shorting involved borrowing and selling 10 shares of a company at $10 each, then buying them back at $5 per share after the price dropped. The investor made a profit of $50 from the price decline.)