Short selling (forex market)

Short selling (forex market)

Short selling is the process of selling an asset the trader doesn’t own so that they can buy them back at a cheaper rate and keep the profit. This is a called a bearish trade in the forex market, due to the trader profiting off decreasing assets.

The trader approaches the broker and borrows assets from the broker. The amount you can borrow depends on the funds in your account, and the funds are used as a marge for the leverage. When you borrow the assets you make a deal to return the same quantity back, not the same value.

Examples

If you borrow 10 cows from your friend to produce milk in your factor, and by the end of the transaction you must return 10 cows.  The value of the cows doesn’t matter to your friend; they just want their cows back. Now, imagine you sold those 10 cows to another factory for $10 each. That’s a total of $100. Then when you try to buy the Cows back they are selling for $9 each. This means that buying 10 cows will cost you $90, not $100. Therefore, you can buy 11 cows. You can return the 10 cows to your friend and sell the last cow to make you a profit of $9 – 10.  

Written by James Ogunsanwo