Editing Short (finance) (section)

== Concept ==
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=== Physical shorting with borrowed securities ===
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To profit from a decrease in the price of a security, a short seller can [[Securities lending|borrow the security]] and sell it, expecting that it will be cheaper to repurchase in the future. When the seller decides that the time is right (or when the lender recalls the securities), the seller buys the same number of equivalent securities and returns them to the lender. The act of buying back the securities that were sold short is called '''covering the short''', '''covering the position''' or simply '''covering'''. A short position can be covered at any time before the securities are due to be returned. Once the position is covered, the short seller is not affected by subsequent rises or falls in the price of the securities, for it already holds the securities that it will return to the lender.

The process relies on the fact that the securities (or the other assets being sold short) are [[Fungibility|fungible]]. An investor therefore "borrows" securities in the same sense as one borrows a $10 bill, where the legal ownership of the money is transferred to the borrower and it can be freely disposed of, and different bank notes or coins can be returned to the lender. This can be contrasted with the sense in which one borrows a bicycle, where the ownership of the bicycle does not change and the same bicycle must be returned, not merely one that is the same model.

Because the price of a share is theoretically unlimited, the potential losses of a short-seller are also theoretically unlimited.

==== Worked example of a profitable short sale ====
Shares in [[Acme Corporation|ACME]] Inc. currently trade at $10 per [[Share (finance)|share]].

# A short seller borrows from a lender 100 shares of ACME Inc., and immediately sells them for a total of $1,000.
# Subsequently, the price of the shares falls to $8 per share.
# Short seller now buys 100 shares of ACME Inc. for $800.
# Short seller returns the shares to the lender, who must accept the return of the same number of shares as was lent despite the fact that the market value of the shares has decreased.
# Short seller keeps as its profit the $200 difference between the price at which the short seller sold the borrowed shares and the lower price at which the short seller purchased the equivalent shares (minus borrowing fees paid to the lender).

==== Worked example of a loss-making short sale ====
Shares in ACME Inc. currently trade at $10 per share.

# A short seller borrows 100 shares of ACME Inc., and sells them for a total of $1,000.
# Subsequently, the price of the shares rises to $25 per share.
# Short seller is required to return the shares, and is compelled to buy 100 shares of ACME Inc. for $2,500.
# Short seller returns the shares to the lender, who accepts the return of the same number of shares as was lent.
# Short seller incurs as a loss the $1,500 difference between the price at which they sold the borrowed shares and the higher price at which the short seller had to purchase the equivalent shares (plus any borrowing fees).

=== Synthetic shorting with derivatives ===
"Shorting" or "going short" (and sometimes also "short selling") also refer more broadly to any transaction used by an investor to profit from the decline in price of a borrowed asset or financial instrument. Derivatives contracts that can be used in this way include [[Futures contract|futures]], [[option (finance)|options]], and [[swap (finance)|swaps]].<ref name=Harris>{{cite book |url=https://books.google.com/books?id=Rd9hDRR1Yx4C&pg=PA41 |author=Larry Harris |title=Trading and Exchange: Market Microstructure for Practitioners |year=2002 |publisher=Oxford University Press |isbn=978-0195144703 |page=41}}</ref><ref name=Chance>{{cite book |url=https://books.google.com/books?id=DT0nnLDMYTgC&pg=PA6 |author1=Don M. Chance |author2=Robert Brooks |title=An Introduction to Derivatives and Risk Management |publisher=South-Western College |isbn=978-0324601206 |page=6 |date=11 August 2009}}</ref> These contracts are typically cash-settled, meaning that no buying or selling of the asset in question is actually involved in the contract, although typically one side of the contract will be a broker that will effect a back-to-back sale of the asset in question in order to hedge their position.