Shorting a stock is essentially the opposite of buying a stock. So instead of making money when a company is doing well, some investors profit if the stock price drops. Instead of buying stock directly, short sellers borrow shares from their brokers and then sell them at the current rate. Now the seller expected the stock prices to drop so that they can buy shares at a new lower cost so that they returned the stocks they borrow from their brokers.
However, in the case that the stock prices increase, the sellers will take a loss since they have to re-buy the stocks at a higher price to pay back the borrowed shares.
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How did Short Selling Stock Start?
Even though short selling has become a common practice in the trading industry today, it is not a custom that was always around. Short selling of stock is believed to have started by Isaac Le Maire in the Netherlands. In 1609, Le Maire was an investor of the Dutch East India Company. He was said to have shorted the company by speculating on valuable cargo being lost in transit from Europe to East Indies or ships getting lost at sea.
Reaction to Short Selling
There is both positive and negative reception of short selling. It is generally considered to be suitable for the market even though it can be challenging for the markets. It makes the trading market more efficient by motivating investors to identify flaws in companies’ financial outlooks and place selling pressure over-valued companies. Short stock selling also leads to better market research.
Reasons for Short Selling Stock
However, short selling is generally despised both among public and other traders at large. One of the reasons for the despised being that short stock sellers’ profit when a company performs poorly. It is believed that everything the practice stand goes against the standards of the business. Several countries have at some point in history have implemented a temporary ban on short selling.
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