Understanding Short Selling in the Forex Market
There are many reasons why investors are unaware of or uncomfortable with short selling. One major reason is because it is counter intuitive. It
makes more sense and is more intuitive for people to buy something, hold on to it, and then sell it at a higher price. You buy a stock at $2, hold onto it
for 6 months, and then sell it for $3. Let's take an example, you buy a house, you live in it, and then you sell it to buy another house. You can buy a
house for investment, and you can rent it out to help pay for the mortgage. You don't live there, but you still own the house. In all of these examples,
you buy something, you own it, and then you sell it.
In short selling, you are selling something that you don't own. It is counter intuitive because you can't go around your neighborhood and sell a house
that you don't own. Hence, short selling does not make a lot of sense to people. Don't worry, the next example will ease you slowly into the concept.
It is midnight, you are out of milk, and your kid is crying. You run over to your neighbor's and ask to borrow a jug of milk. It happens that your neighbor
just bought a jug of milk for $5, but he refuses to take your money. Instead, he tells you to buy him another jug of milk later, and you will be even. The
next day, you go to the supermarket and the jug of milk is on sale for $3. You buy the jug of milk and return it to your neighbor and save yourself $2 in
the process. Basically, you consumed the milk (an asset that isn't own by you), and then you delivered an identical milk back to your neighbor at a later
time. This is the concept of short selling. A short sale is the sale of a security that isn't owned by the seller, but that is promised to be delivered.
Say you don't think that Nortel Networks' share price should be at $120 per share because the company is not profitable. You can borrow 10 shares
from your stockbroker, and sell them for a gain of $1,200. When the stock price drops to $70, you buy back the 10 Nort