Question

What is short-selling and what Mechanisms are involved

in short-selling?
please explain in simple english using bullet
points

Answer 1

Short selling is a strategy where an investor borrows shares to sell them at current market price, aiming to buy them back later at a lower price. The mechanisms include margin trading and the use of a brokerage account that permits short selling. The strategy risks incurring losses if share prices rise instead of fall.

Step-by-step explanation:

Short-selling is an investment strategy where an investor borrows shares and sells them on the open market, planning to buy them back later at a lower price.

• An investor borrows shares from a broker.
• The investor immediately sells these borrowed shares at the current market price.
• Later, the investor buys back the same number of shares when the price has dropped.
• The investor returns the shares to the broker, keeping the difference in price as profit.
• If the share price rises instead, the short-seller incurs a loss when buying back the shares at the higher price.

Mechanisms involved in short-selling include margin trading, where investors use borrowed funds to trade, and a brokerage account, which must approve the investor for short-selling. Additionally, there is usually a fee for borrowing the shares, and the investor is responsible for any dividends paid out during the period they have borrowed the shares.