What is a short position?

What is a short position?

A short position is a sale made by an investor for a security which he or she will deliver to the buyer in the near future, but which he or she is hoping will go down in price in the near future so that a profit can be retained from the price collected in the short sale.

A short position is a bearish play on a security which an investor believes will decrease in price in the near future. The investor offers shares for sale, and collects the current market price for the shares from the buyer.

The investor must have a source for acquiring the shares which are delivered to the buyer by the settlement date, and this can be done using the investor's broker. The broker will probably use shares from its own inventory, or from another customer's margin account.

The investor selling short must also be approved for margin trading and have adequate margin in his account. The broker has effectively loaned the shares to the investor, and the investor may owe some interest on the loan until the investor fills the requirement to replace the shares, and "covers" the short, which closes the position.

It is possible that the investor may be asked to fill a margin call in the meantime, or could be forced to buy to cover, but this is not likely to happen. The broker may also charge a fee on either side of the transaction instead of ongoing interest.

The investor hopes that the price of the security in question will go down before he covers the short, and can retain a profit from the amount paid by the buyer who purchased the shares at the outset of the short sale. The investor only has to cover the number of shares borrowed (plus interest).