Finance - Short Selling Strategy

After studying finance knowledge for about a year, there is few things that I found quite interesting. And one of them is the strategy of "short selling".

Usually we assume that when we purchase and hold an asset, we will make profit when price increase and we sell it. But actually we do able to make profit even there is a price decrease of the asset value, and more interesting, the profit large possibly more higher than simple buy low sell high (also known as "long" as inverse to "short")strategy.

Well, the theory is like this, assume we borrow an asset worth RM500, and we sold it to another party at RM500 too. And after that, the asset value dropped till RM200, and we purchase back the asset at RM200 and return it to our lender, thus, the remaining RM300, absolutely is our net profit (and more important, the above trading activities can execute without origin cost!).

It seems interesting if compared to long strategy, but, of course there are few issues that a short seller have to bear in mind when running this strategy. First, a short seller only can make profit if only the price movement is as expected. Second, even though making profit without using initial cost ( high leverage) seems interesting, but when it is in adverse way, the same effect occur that the short seller have to lost a huge margin of money too.

Therefore, a successful short seller must have the ability to predict future asset price movement precisely in order to run a successful short strategy, so it is advise that people who are not damn good in acquire or predict the first hand asset market information better not to touch this~:P, this post just a knowledge to share but not to recommend people to adopt this strategy~^^.

Next post I try to share some famous people who are good in this strategy and how they work it.