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Short sale



Short selling, also known as “short selling” , involves selling securities on a stock exchange even if the seller does not have the securities in his possession at the time of the sale. With this strategy, a seller can benefit from very high returns due to falling stock prices. Compared to an option deal, which has fixed option dates, a short sale is more of a short-term deal. The reason for this is that the securities have to be delivered after a short period of time. At the same time, short sales are also futures. A short sale of stocks can only work if trading in the securities does not require immediate delivery of the securities. The exact time of delivery depends on the respective exchange. For example, in Frankfurt the delivery date is three days after the sale, while in London it is five days.


An investor first borrows shares in order to sell them at the current price level. He can then buy back the shares at a cheaper price after the price is expected to fall. This logically creates a difference (profit for the investor). The short seller borrows the stock from a broker, bank, or even fund for a predetermined amount in order to be able to return them later for a profit. Brokers and funds borrow a portion of the securities they hold in order to make an additional profit on the borrowing fee. In the case of a short sale, the seller then sells the shares on the stock exchange. If the price falls as expected, the seller can buy back the shares at a lower price. In this case, the profit corresponds to the difference between the sales and purchase price minus the corresponding loan commission, of course. However, if the stock price unexpectedly rises again, the short seller is certain to make a loss. He then has to buy back the stock at a higher price and return it to the lender in a timely manner.

An investment is always there if, after a thorough analysis, security is first and foremost followed by a satisfactory return.
(Benjamin Graham)


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