What is Short Selling? What are the Risks and Benefits?

​How can an investor profit from short selling stocks?

What is Short Selling?

Any sale of a security that is contingent upon the delivery of borrowed securities is referred to as short selling. It's a trading strategy that lets the investor profit from a predicted price drop in the future. Using this trading method, securities that are borrowed are sold at a higher price and then purchased at a lower price in the future to be returned to the lender.

What are the benefits of Short Selling?
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A vital part of the ecosystem of the equity markets, short selling plays a significant role in promoting liquidity and preserving market efficiency. It gives investors a means of expressing their divergent opinions about the existing valuations, which promotes more effective price discovery and the deflation of price bubbles. However, it also makes it possible for investors to mitigate losses in the event of a slump by hedging their investments.

What are the risks of Short Selling?
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​The following are a few drawbacks of short selling:

Trend of Appreciation

Over time, the stock market tends to rise, which makes short selling undesirable.

No End to Losses

A shorted stock's price may continue to rise, putting the short seller at risk of incurring limitless losses.

Margin Risks

It is necessary to borrow stocks for short sales and use margins, which come with costs, interest, and margin calls.

Quick Squeeze

Short sellers may be forced to purchase shares to cover their position if the price of the shorted stock rises suddenly and sharply, which would raise the price even further.

​In a recent PSE update on short selling, the exchange is extending the planned launch and implementation of the PSE Short Selling Program from October 23, 2023, to November 6, 2023 (the short selling go-live date).

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For more information about securities borrowing, lending, and short selling, you may read this related topic:

PSE Announces an Update on the Short Selling Program
​PSE Announces Effectivity of Short Selling Guidelines, Other Relevant SBL Developments