Definition of Short Selling

Short selling is a trading strategy that allows the speculators to benefit from selling securities in advance when they speculate that the prices will fall. It allows investors to hedge against the declining prices of stocks and other securities. The speculators going for short selling might sell shares they possess now assuming that the share prices are going to decline.

The hedging is to mitigate the risk associated with a trading position. An investor initially acquires shares by borrowing with the perception of declining prices. The investors will look for buyers that are willing to buy shares at market price. The money collected is then used to return the shares to the lender, at the expiration date when the price is even lower. However, the risk in short selling is higher as the prices can infinitely increase.