In financial markets, which operate with the logic of buying instruments cheap and selling them at high prices, sometimes the process does not maintain how we expect. We explained the short-selling process in the stock market and forex in full detail.
When it comes to investing in financial markets, the first instrument that comes to mind is usually stocked. By investing your money in them, you can have a share in the shares of world-famous companies.
Stocks that you expect to make money by buying low and selling high can be instrumental in profitable investments with the right decision at the right time. For instance, if you have a feeling that a company will make a high profit, you tend to sell the shares that belong to it, if you have it.
You may have predicted that sometimes the company will lose value and its stocks will fall due to market volatility. In this case, the only solution would be to either sell it without delay or continue to hold it in the long run. Below, we have examined the short-selling process that will allow you to profit from stocks that will decrease in value in the stock market and forex.
What is Short Selling?
No investor wants his investment instrument to lose value. However, prices in the market change due to reasons beyond the control of the investor. Investors who do not want to make a loss take action immediately in such a case.
Short selling is a redeeming method that increases investors’ chances of making a profit. But technical knowledge is required.
This type of transaction, which offers investors the opportunity to gain from the securities that will decrease in value, is made through brokers operating by the principles of the various regulations.
Short-Selling Transaction in Forex Market
We mentioned that one of the most important advantages of the Forex market is two-way transactions. It is possible to perform short-selling transactions in Forex much simpler than in the stock market.
Just like if you trade in the direction of buying when an investment instrument gains in value, you can make money by initiating a trade in the direction of sales when it loses value. In addition, you do not need to have this investment tool in your hand to make this transaction. For this reason, it is seen as a more profitable method than the stock market.
One of the points you need to know is that the “sell” order in the forex market means a short sale of the stock market.
Let’s explain how the short selling process is applied in the forex market with an example; Consider the times when gold prices lost value. During these times, many investors turn away from gold. But you can continue to profit from gold, thanks to the selling feature of the forex market.
As you know, gold is traded in US dollars in the markets. This process takes place in the form of XAU / USD parity in the forex market and you buy and sell this parity.
When you want to buy in XAU/USD parity; You buy XAU, you sell USD. When you want to sell, you buy USD and sell XAU. In this way, you will profit from the depreciation in gold prices.
Short selling transactions in Forex are a less risky type of transaction compared to the one made in the stock market. In addition, you can make your investment and earn money without dealing with long terms and commission fees as in the stock market. You can understand this process more easily by taking advantage of the free training and trial accounts of the Forex market.
Short Sale Transaction in the Stock Exchange
According to some, short selling in the stock market is a very risky practice and should be avoided. First of all, we should state that this transaction is legal; because the people who make this transaction also contribute to the formation of real prices in the stock market.
There is a fine line between short selling and manipulation. Being aware of this distinction is important so that you don’t get involved in a crime unintentionally while trying to make money.
Short selling means borrowing a stock in the stock market. Let’s explain with an example; You predict that a $100 stock of company A will decrease to $50 in a month period.
You followed the market and company data and made your analysis. Let’s say all the results you get indicate that the stock will lose value. In this case, you can turn that company’s stock into a profit by short selling method.
So, what ways will you follow to sell short?
You have indicated to your brokerage house that you want to buy the stock of company A for short selling. In this case, it is understood that you want to borrow the stock of company A.
To better understand the logic of the business, you might think that you are renting it from someone who owns this stock. The brokerage houses will obtain the stock you want to borrow from the accounts of their other customers upon this request. Of course, the person must have knowledge and permission on this subject.
When you send this request to the brokerage house, those in their portfolio will lend you the shares of company A and deposit the amount into your account. As a result of this transaction, you owe the brokerage firm both a stock and a commission fee. In addition, you will sell the stock you have borrowed for $100 and you will receive $100.
Your expectations came true and the price of the stock dropped to $5. The stock is now trading at $50. But you owe the brokerage a stock and a commission. In this case, you deduct the current price of the stock, $50, and the commission fee from the $100 you have. In this way, you will have a profit of just under $50 and this is your profit.
What Should Be Considered While Making a Short Sale Transaction?
Short selling, which is an advantageous option in the exchange of investment instruments in the stock market and forex market, in the simplest terms, prevents investors from making a loss. However, this aspect of it does not mean that it is a risk-free transaction.
In other words, while short-selling increases the probability of making a profit for the investors, there are also some risks. Therefore, there are some points that investors should pay attention to while making the transaction.
First of all, you should decide when to use the short sale, just as you carefully choose the time to invest. You also need to be sure that the security in question will suffer a loss. Because the prices in the market are constantly changing and instant changes can mislead you.
Your biggest assistant in short selling transactions will be your brokerage firm. The short sale order you will give to the brokerage houses that are responsible for transmitting the buy-sell orders you give to the market is the first step you will take to realize the transaction.
A short-selling framework agreement must be signed between the brokerage house and the investor to carry out the transaction. Therefore, it is important to make your choice of broker based on trust to get efficiency from the transaction.
The price of investment instruments in the stock market or forex may fall or rise for various reasons. An investor who has invested his money in the stocks of any company needs to know what affects stock prices. In this way, he can make predictions about prices.
In addition to all these, the fact that investors have a good analysis ability is another important point in down selling transactions. In this way, you can make more accurate predictions about the course of prices.
Finally, we need to touch on the subject of knowledge and experience, which are indispensable for investment transactions. Trading in the market without knowledge and experience is one factor that increases the risk, and the same is true for short-selling transactions.
What are the Differences of Short Selling in Stock Exchange and Forex?
As we mentioned in the previous parts of our article, short selling transactions can be used both in the stock and forex markets. However, this process differs in some aspects in the two markets. However, we cannot say that it is completely different.
Forex is a market with higher leverage ratios than the stock market. Therefore, while short-selling of stocks above a certain amount is made in the stock market, there is no such restriction in forex. Any investment vehicle can be included in a short sale transaction.
While the sell orders given in forex, which has a large trading volume, are executed instantly, the sell order in the stock market may be realized a little later.
