What are short positions?

What are short positions?


Short positions are a type of operation used by asset managers or more experienced investors to try to get profitability in bear markets. Specific, it consists of borrowing an asset to sell later. Once the expected price drop has occurred (if it occurs), the investor returns to buy it at a price lower than the initial price to return it to its original owner. Profit is the difference between the price at which the asset was borrowed and the price at which it was purchased to return it. A hypothetical example: we can borrow shares of a textile company at 26.5 euros and sell them because we think the company will publish disappointing online sales figures, which will cause a severe punishment on the stock market. Once the accounts are announced, if our forecast is met and the value falls, say, up to 23 euros, we will buy the shares at that price to return them to their original owner. In that case, we will have earned 3.5 euros per share (less the fees and commissions of the loan).

Although the strategy may also fail. In the same example above, if instead of falling to 23 euros our prediction fails and rise to 28, we will be forced to buy the most expensive shares to return them to their owner, with the consequent disability of 1.5 euros per title.

But trying to take advantage of bearish markets is not the only use of bearish positions. These are also used as a hedging tool to protect long positions (which are normal, those in which we buy a security thinking that it will revalue). How? Opening short positions that are opposed to other long that we have open. For example, if we know that oil and oil are correlated, we can open long positions on oil and short on oil. In this way, if oil falls, short positions in the oil companies will do well and compensate for the losses in oil.

This strategy consists of asking for an asset borrowed to sell it later, waiting for its price to fall

This type of strategies consisting of betting that a value or asset is going to fall on the stock market are very used by fund managers. The only condition to be able to implement them is that there are investors willing to lend their values. Although, these are fairly high risk operations, which is why they are not recommended for investors with little experience or risk aversion.


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