Short Selling - What does it mean?
So you might have heard of this term and that it is being banned in the investment world as of today. Why is that so?
So this basically refers to the selling of shares that you never even own. You know the concept of buying low and selling high right? Short selling is just the reverse step! It means to sell high first and then buy low. This technique is employed when you regard that the investment THAT YOU NEVER OWN is going to drop in value. So basically, you promise someone that you will sell him this amount of investments at this price, but you never really own it. Then later when the investment falls, you can buy it at the price and then sell them are the higher price you both promised to sell each other!
So why is this illegal? Well, technically when the investment price really falls, there isn’t really much of an issue. The real issue only comes in when the investment rises in value after which. Then, people who make all this promises never owned the investment in the first place, and they might not even have the amount of money to buy it at the price to sell it to others to begin with. So when the investment rises in values, it makes it even harder for the seller to fulfill their commitment and this really causes a massive chain of defaults in a large scale. Put it in real life terms – You really gotta understand that people who usually promise to deliver to you a kick ass meal when they haven’t even got the ingredients at hand, usually make a pretty lousy meal at the end of the day!