” Short-selling often has a bad image, but it’s a legal practice that brings liquidity to inactive markets and acts as an important tool for investors.
Short selling is a strategy, where an investor predicts the future fall of a stock price. With this in mind, the short-seller will sell the stock which is owned by someone else. In order to do this, he/she will need a broker to arrange the borrowing from the stock lender.
The money that the short-seller gets for selling the security is stored by the broker, i.e margin. For this to happen the short seller also has to pay an interest, also called a collateral. The size of an interest will depend on the type of the borrowed stock. The broker puts the proceeds from the stock selling and the collateral into the short-seller’s margin account.
It’s a risky journey, where the chance of losing is very high. Prices do not always behave as predicted.
If the price falls, the short seller makes extra money and returns the original borrowed sum. If the price goes up, he/she will lose money, and will have to pay this difference from the margin account.