Shorting

If a trader believes that the price of an asset will not rise but fall, he can still make money on it by ‘shorting’ it.

To do this, he borrows some of the assets in question, say some shares, from a long-term holder, such as a pension fund, and commits himself to returning them at an agreed time. He then sells them on, and is now ‘short’: he sold something he did not own and will – at some point – have to buy it back to return to its owner.

Ideally, by the time he needs to do this, the price will have fallen. If so, his profit will be the difference between the price at which he first sold the shares and the price at which he bought them back.

If he gets it wrong and the price rises instead, he’ll have lost money on the deal.

• Watch Tim Bennett’s video tutorial: Why are short-selling ban won’t work.

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