Video Player is loading.
VIDEO: What is shorting?
Highlights
- Short selling (or ?shorting?) inverts the most basic rule of investment, which is to buy low and sell high.
- Investors who short sell bet on stocks they believe will go down.
- Short selling is risky and complicated, but the returns can be very big.
An investor who short sells borrows shares from a broker at current market price and agrees on an expiration date (the date by which the shares should decline in value).
If shares decline in value before the expiration date, the investor can buy the shares on the open market for the reduced price.
One of the most famous examples of short selling was the successful gamble made by investors who predicted the US housing market crash of 2008.
Short selling is risky because while stocks can continue to go up in value, they can only go down as low as zero. This can happen quickly and cost more than the original investment.