What does it mean to have a short position in a stock?

When an investor uses options contracts in an account, long and short positions have slightly different meanings. Buying or holding a call or put option is a long position because the investor owns the right to buy or sell the security to the writing investor at a specified price.
A.

What is a stock short?

Shorting, or short-selling, is when an investor borrows shares and immediately sells them, hoping he or she can scoop them up later at a lower price, return them to the lender and pocket the difference. But shorting is much riskier than buying stocks, or what's known as taking a long position.
  • Is it illegal to short sell?

    In 2008, the SEC banned what it called "abusive naked short selling" in the United States, as well as some other jurisdictions, as a method of driving down share prices. Failing to deliver shares is legal under certain circumstances, and naked short selling is not per se illegal.
  • How do you borrow a share?

    Stock lending and borrowing (SLB)is a system in which traders borrow shares that they do not already own, or lend the stocks that they own but do not intend to sell immediately. Just like in a loan, SLB transaction happens at a rate of interest and tenure that is fixed by the two parties entering the transaction.
  • What is covering a stock?

    This process is called short covering. For example, a trader shorts 1,000 shares of XYZ stock at $20 per share, believing the share price will fall. Instead, the price rises to $25 per share. The trader has substantial loss exposure, so she purchases 1,000 XYZ shares at $25 per share to cover her short position.
B.

What is the definition of short selling?

Short selling is the sale of a security that is not owned by the seller or that the seller has borrowed. Short selling is motivated by the belief that a security's price will decline, enabling it to be bought back at a lower price to make a profit.
  • What is a short seller trying to do?

    Short selling (also known as “shorting,” “selling short” or “going short”) refers to the sale of a security or financial instrument that the seller has borrowed to make the short sale. The short seller believes that the borrowed security's price will decline, enabling it to be bought back at a lower price.
  • What is going long?

    In terms of a security, such as a stock or a bond, or equivalently to be long in a security, means the holder of the position owns the security and will profit if the price of the security goes up. Going long a security is the more conventional practice of investing.
  • What is a stop loss order example?

    How Stop-Loss Orders Work. A stop-loss order is essentially an automatic trade order given by an investor to his or her brokerage – only be executed once the price of the stock in question falls to the specified stop price stated in the investor's stop-loss order.
C.

What does a short position mean?

While stock-market punters normally buy shares in the hope the price will go up, taking a "short position" means betting on the price going down. The process is simple. A trader borrows shares from a big City investor who charges a fee for the service.
  • What is long and short position?

    A long (or long position) is the buying of a security such as a stock, commodity or currency with the expectation that the asset will rise in value. In the context of options, long is the buying of an options contract. A long position is the opposite of a short (or short position).
  • What is meant by a short circuit?

    A short circuit is simply a low resistance connection between the two conductors supplying electrical power to any circuit. This results in excessive current flow in the power source through the 'short,' and may even cause the power source to be destroyed.
  • What is a short option?

    Short selling and put options are essentially bearish strategies used to speculate on a potential decline in a security or index, or to hedge downside risk in a portfolio or specific stock. Short selling involves the sale of a security that is not owned by the seller, but has been borrowed and then sold in the market.

Updated: 24th September 2018

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