Short Selling: What Experts Should Note Pt. 1

Meanwhile, for portfolio managers or investors they use hedge to battle the downside risk in the long position. But why do traders need short selling to speculate？ Speculating means you will meet the possibility of substantial risk and in the trading. In other words, hedging is a common transaction that involves placing an offsetting position to limit risk.

The position in short selling begins by borrowing shares of assets or stock investors believe will decrease in value. Next, the investor sells these borrowed stocks or assets to buyers. In this situation, traders could start bidding the lower cost because they bet that the price would continue to jump. Because trading profit is infinite, the loss in short selling is also infinite. But from where do the sellers open the position？ Usually they open short selling from a broker-dealer. They hope that they could somehow buy back if the price declines.

In order to close a short position, a trader could buy the shares back on the market. Traders should be aware about the account and interest charged by the brokers. Furthermore, in order to start short selling, a trader should own a margin account. Margin account is basically a brokerage account the broker lends the customer to pay stocks or other products in finance.

When the position opens, a trader sometimes must pay for charges too. It is important to know that some financial institutions set minimum values for the margin account they maintain known as the maintenance margin. These financial institutions are FINRA (Financial Industry Regulatory Authority Inc, NYSE (The New York Stock Exchange), and the Federal Reserve.