Short
Tue, Apr 15In trading, the term "short" refers to a position that generates a profit when the price of an asset decreases. It is often used in phrases like “going short,” “taking a short position,” or “selling.”
When engaging in the forex market, where transactions occur in currency pairs, “going short” means selling the base currency while buying the quote currency. Here’s how it operates:
You predict that the value of a specific currency will fall against another currency in the future. You sell a currency pair, which involves selling the base currency (the first currency in the pair) and purchasing the quote currency (the second currency in the pair).
If your forecast is accurate and the base currency depreciates against the quote currency, you can repurchase the currency pair at a lower price. The profit is the difference between the initial selling price of the currency pair and the price at which you bought it back.
For instance, if you anticipate that the EUR will weaken against the USD, you expect the EUR/USD currency pair to decline. You decide to sell (go short on) the EUR/USD pair at 1.2000. If your prediction holds true and the rate drops to 1.1900, you can buy back the EUR/USD pair at this reduced price. The difference of 0.0100 (commonly known as 100 pips in forex trading) is your profit.
However, it’s crucial to keep in mind that if the base currency appreciates against the quote currency (meaning the price of the currency pair rises), you will incur a loss. This occurs because you will be repurchasing the pair at a higher price than what you initially sold it for.
“Shorting” or “going short” in stock trading refers to selling a stock that you do not own, with the expectation that its price will decrease in the future, allowing you to buy it back at a lower price and profit from the difference. Here’s a step-by-step breakdown:
You believe that the price of a stock will decline in the future. You borrow the asset from a broker and sell it immediately in the market at its current price.
If your prediction is correct and the asset's price falls, you then buy back the asset in the market at the lower price. Afterward, you return the borrowed asset to the broker. The profit is the difference between the price at which you initially sold the asset and the price at which you repurchased it.
For example, if you think the price of stock XYZ, currently trading at $50 per share, will decrease, you borrow 100 shares and sell them for a total of $5,000. Later, if the price of XYZ drops to $40 per share, you buy back 100 shares for $4,000 and return them to the broker. The profit of $1,000 ($5,000 – $4,000) is yours, excluding any fees or interest charged by the broker for the loan.
As with all trading strategies, shorting carries risks and necessitates a thorough understanding of the market along with careful risk management.
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