With the recent increase in interest in the stock market and #Kripto currencies, we can say that one of the most curious questions has been the issue of short selling. Let's start right away with our article where you can find answers to all the questions such as what is short selling, which allows you to make money from the market during declines, and does short selling decrease the stock?
What is Short Selling?
Short selling is the process of selling an asset (stock, commodity, foreign currency, cryptocurrency) that is not actually owned. This process is often used by investors with the expectation that the value of an asset will decrease.
In a short sale transaction, the investor first borrows a specific asset, usually from a brokerage firm. It then sells this borrowed asset at the market price. If the investor's expectation comes true and the price of the asset falls, he can buy back the same asset at a lower price and return it to the institution from which he borrowed it.
At the end of this transaction, the investor earns a profit equal to the difference between the price at which he first sold the asset and the price at which it was repurchased later.
Short selling is a strategic method that allows the investor to profit from the decline in asset values. However, short selling can be a high-risk strategy because if the price of the asset rises, the investor can suffer large losses.
Now that we have answered the question of what short selling is, let's talk about the purpose of short selling and examples.
For example, an investor who borrows a share from a brokerage firm and sells it short at 100 lira, is forced to buy back the same share at a higher price when the price of the asset rises to 150 lira. Because he is obliged to give the borrowed shares to the brokerage firm. In this case, the investor loses 50 lira.
That's why short selling is often used by more experienced investors, doing a specific market analysis and risk management strategy. But when used correctly, short selling can help an investor diversify their portfolio and maximize potential profits.
Short Selling in Bitcoin and Cryptocurrencies
Short selling transactions can also be carried out in Bitcoin and other cryptocurrencies. This is usually done with the expectation that the value of the cryptocurrency will decrease. Now let's continue with an example from Bitcoin.
If an investor thinks that the value of Bitcoin will decrease, he can short sell. The investor first borrows Bitcoin from a brokerage firm or cryptocurrency exchange.
Let's say the value of this borrowed Bitcoin is currently $50,000. The investor immediately sells the borrowed Bitcoin short and gets $50,000.
If the investor's expectation comes true and the value of Bitcoin falls, for example to $40,000, the investor buys the same amount of Bitcoin for $40,000 and returns it to the institution from which he borrowed it.
In this case, the investor makes a profit of $10,000, which is the difference between the price at which he first sold Bitcoin and the price at which he purchased it again.
However, it should not be forgotten that if the value of Bitcoin increases, the investor will suffer a loss. If the price of Bitcoin rose to $60,000, the investor would have to buy Bitcoin at that price and return the Bitcoin he borrowed. In this case, the investor would lose $10,000.
With this example, we can say that short selling is a risky transaction and requires a careful strategy. For this reason, short selling transactions are generally preferred by investors who are experienced and can read the market well.
What is the Purpose of Short Selling?
The main purpose of short selling is to make a profit with the expectation that the price of an asset will decrease. In other words, short selling allows investors who predict that a certain asset will lose value, to profit from this loss of value.
The short selling process is based on the investor selling a borrowed asset (such as stock, Bitcoin) at the current price, then buying this asset at a lower price when its value decreases and returning it to the institution from which he borrowed it.
In this way, the investor earns a profit equal to the difference between the sale and repurchase price of the asset.
In addition, another purpose of short selling is to increase the efficiency of the markets. Efficiency of markets means that they reflect the true values of assets.
So, does short selling bring down the stock?Short selling helps correct the prices of overvalued assets. This increases market efficiency and creates a healthier market structure.
However, short selling is a risky transaction and a strategy that should be managed carefully by investors. If the price of the asset rises rather than falls, the investor will have to buy back the borrowed asset at a higher price, causing a loss.