Forex sells short means selling borrowed security, anticipating that the price of a security would go down. On the other hand, a trader can also sell long, meaning buys a security with an expectation that the price of the security would rise in value.
One thing notable about selling short in the market is the fact that a trader can borrow securities, sell them in the market, and hopefully make some profit off it before returning the borrowed security to the owner.
THE POSITION OF A BROKER IN A TRADER’S SHORT POSITION
Anyone who wishes to sell short in the market must be properly registered with a reputable broker. If you wish to sell short in the market, he or she is expected to specify by placing an order which the brokerage firm is expected to carry out. When you wants to sell short, she goes into an agreement with her broker regarding how much security to be borrowed and the interest rate of the borrowed security. The trader now sells the borrowed security, hoping that the value of the security would decrease. If the price of the security decreases, buy them back and returns them to the broker with the agreed interest; while she keeps the profit. If the value of the security increases, against the hopes of the trade, she would have to take a loss and owe the brokerage firm.
Also, before a trader can sell short in the market, she must have an account that allows the rules of margin and leverage.
BENEFITS OF SELLING SHORT IN THE MARKET
- If all goes as expected, selling short in the market can bring about great profit to the trader. It also adds some value to the portfolio
- Selling short is one way you can protect her long-term investments. Using a fx tool known as hedging, protect long-term investments using short positions
- From a careful observation, trade even when she does not have enough trading capital. As a fx trader fully registered with a reputable broker, she can opt to sell short when she is short on investment capital, make some profits from the trade, and offset her debt.
THINGS TO CONSIDER BEFORE SELLING SHORT IN THE MARKET
- Interest rate: The margin interest of operating a short position can add up over time; especially if the short position runs for a long period of time.
- Stock dividend payments: A trader selling short would not benefit from corporate decisions like stock dividend payments because the trader is trading on borrowed securities.
- Limitations: When traders keep taking the notable quantity of a particular security, the public confidence towards that particular stock would increase because it signifies that that security may decrease in value. This would make the stockholders place a restriction. This means any trader who has such stock cannot sell the stock until the restriction is lifted.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.