Finance Tip of the Week: Investing Lingo
by Gareth Cotten on 09/06/10 at 9:23 am
No comments
Short-selling. A term you may hear thrown around a fair amount is ‘short-selling’ or ‘shorting’.
Normally, when you buy a stock or share, you become the registered owner of that particular unit . Then, when you want to sell it, somebody who wants to buy it takes over the ownership of that stock from you at the agreed price. (Obviously, this is a major simplification, and there are other more complex variations of this, but they are unnecessary for explaining the current concept).
When short-selling, however, it doesn’t work in quite the same way. Here, you form an agreement with somebody who wants to buy the stock at a future date, at a specific price, but the major difference is that you don’t actually own the stock yet.
At the agreed date of sale, you then purchase the stock at the current market price, and subsequently transfer it to the buyer. The idea is that you will make a profit, as you think the stock will be cheaper to buy on the future date than what you will receive for it from the buyer.
So you’re essentially betting that the stock (or currency) will decrease in value between now and the date that you’ve agreed to sell it. As with all investments – especially speculative ones – there is an inherent risk that you will lose money.
In this case, if the stock price rises above the price that you agree to sell it at, you will still have to buy it at the higher market price – and then sell it at the pre-agreed price to the buyer, making a loss in the process…
Gareth Cotten is one of the growing breed of SA entrepreneurs with that ‘world-domination’ look in his eyes. Gareth runs the coaching and consulting practice 'Good Advice'. Gareth is also the 'course convener' for the University of Cape Town (Law@Work) Start and Manage a Small Business course and the University of Cape Town Basics of Financial Management course. View more articles by Gareth Cotten.
Tags: Business Lingo, finance, investment
