Short Position
The taking of a short position or “short selling” consists of the following:
Company A borrows an asset from Company B. Company A agrees to return that asset (or an equivalent asset) at a specified future date.
Company A then sells the asset to Company C (for example at $10 each).
When the time comes to return the asset to Company B, Company A buys an equivalent asset from the market.
If the market price has gone down (for example to $7) since he sold it to C he will make a profit of the difference ($3). If the market price has instead gone up (for example to $12) then he will have made a loss ($2).
A company would therefore take a short position where it expects the value of an asset to go down. This is the opposite to where a company takes a long position (holding on to an asset) expecting its value to go up.
Company A borrows an asset from Company B. Company A agrees to return that asset (or an equivalent asset) at a specified future date.
Company A then sells the asset to Company C (for example at $10 each).
When the time comes to return the asset to Company B, Company A buys an equivalent asset from the market.
If the market price has gone down (for example to $7) since he sold it to C he will make a profit of the difference ($3). If the market price has instead gone up (for example to $12) then he will have made a loss ($2).
A company would therefore take a short position where it expects the value of an asset to go down. This is the opposite to where a company takes a long position (holding on to an asset) expecting its value to go up.
