Hedge Fund Strategies>Equity Long/Short>Short
Short: The selling of a borrowed security with the expectation that it will fall in value.
Example:
1. You borrow 100 shares of stock worth $10 a share. You owe now owe the lender 100 shares
of stock.
2. You then immediately turn around and sell those borrowed shares at $10 per share,
netting you $1,000.
3. If the stock falls to $8 per share. You can take $800 of the $1,000 you netted before
and buy the 100 shares back which you will then give to the lender to satisfy your debt of
100 shares. The $200 difference between what you earned by selling the borrowed shares,
and what you needed to repay the lender of those shares is your profit. If, however, the
stock rises to $12 per share, then you must use all of the $1,000 you received by selling
the borrowed shares, plus $200 more in order to repay the debt of 100 shares. The $200
extra is your loss.