Shortselling - What is it?

If you are used to common stock trading, it may be difficult to understand the term shortselling. In the case of ordinary stock trading, you typically buy a number of shares, and then hope that the company in question will increase in value. This is not necessarily considered a daytrader. Typically, a day trader will deal with CFD contracts or futures, for example, reflecting the stock price. But in that construction, you do not own the stock. This allows you to "short" or "sell the market", thus gaining profit even when the stock price drops.

When you "sell the market" you should imagine that you first borrow a number of securities (typically in CFD contracts or so-called futures). Once you have borrowed them, you will immediately sell them to the best bid. Next, you hope that the price will fall, after which you bought back the shares again - hopefully at a cheaper price. Once done, return the papers back to the original owner with a win.

To make an example, you can imagine going to your neighbor and asking if you have to borrow his brand new lawn mower for two days. Once you have borrowed it, you will immediately sell it to the Blue Newspaper for 5,000 kroner (Danish currency). Two days later, you'll see exactly the same type of lawn mower, but now it's reduced to 4000 kroner (Danish currency). You buy the mower and hand it back to the neighbor with thanks for the loan. The neighbor has got the lawn mower back, and you have earned 1000 kroner (Danish currency) in the meantime.
However, in relation to CFD trading, one must ensure that the seller fully agrees to make money on his "lawn mower". At the same time, you are the borrower who is at risk because it may not be possible to buy the "lawn mower" at a cheaper price during the period. In that case you lose the difference, because the neighbor must have his machine back - no matter the cost.

To "sell the market" basically corresponds to lending the neighbor's lawnmower and then selling it in the hope that the price of mowers has fallen before returning to the neighbor.

Especially during the financial crisis, shortseling was discussed. Some people thought it was immoral to wonder if a company was doing poorly and gaining market value. It is up to the individual day trader to decide whether to stand for the moral of "shortselling", but in reality there is also a lot of common sense associated with the term.

Already in the 19th century, farmers wanted to sell their products on contract at a fixed price in the future. They secured by selling the grain on contract at a fixed price in the future. Then it was suddenly the buyer who stood with the risk (but also the gain) if the price of the grain rose / decreased more than the deal price.

The modern history of purchase and sale of contracts dates back to 1848 in Chicago, as the city had become the headquarters for storage, sale and distribution of grain. The grain trade was seasonally-stressed, and farmers wanted to guard against wild fluctuations in grain prices that could at worst threaten their existence. They secured by selling the grain on contract at a fixed price in the future. Then it was suddenly the buyer who stood with the risk (but also the gain) if the price of the grain rose / decreased more than the deal price. In the queue of this relatively transparent construction, a number of intermediaries, who constantly bought and sold the contracts on grain, emerged. Thus a market for speculation and shortselling emerged.

At the same time, one can argue positively that a lot of buyers and sellers help make the market liquid and a liquid market may ultimately mean that pricing of a product may become more correct. Here you can imagine what would happen if there were many sellers (for example, grain) but only a single buyer. In that situation, the buyer will have the power and ease but could certainly push the price longer and further down. Finally, farmers will badly get their business to run around. In that regard, most farmers will end up wishing that there was more than one buyer of their grain.