Also known as short selling, going short is a term used to describe investment transactions in which the seller does not actually own the shares, but has been promised delivery of those shares. Often purchased using margin accounts rather than cash accounts, going short involves selling securities that are anticipated to experience a downturn in price within a short period of time. The idea is to buy now while the price is stable and generating a small amount of increase, but to sell off the shares before the projected downturn actually takes place.
The term is also sometimes used in currency trading as well. In this application, going short has to do with selling based on the projected relationship between the base currency and the quote currency. For example, if the US dollar is used as the base currency, and that dollar is equal to 100 Japanese yen, the investor may decide going short now is the best approach if that single US dollar will become worth less than that 100 yen. By selling short, the investor sidesteps the loss and is able to move on to more lucrative currency trades.
As with most investment strategies, going short requires having a strong understanding of market conditions as they exist today, and understanding what is most likely to happen in those same markets in a relatively short period of time. By accurately evaluating upcoming conditions, it is possible to use the margin account to make purchases now and quickly sell those acquisitions before the unit price begins to fall and a loss is incurred. Assuming that the downturn follows a brief window of increase in the unit price, the investor may be able to claim the return generated during the delivery period, then pass on the asset to the new owner who ultimately absorbs the loss once the unit price begins to falter.
The process of going short can work very well when attempting to generate a small amount of return. Timing is key to the success of the strategy. Should the investor misjudge exactly when the acquired investment will begin to decrease in value, there is a chance that he or she will miss that small window of opportunity to earn any return, and may in fact realize a loss before passing on the asset to a new owner. This means the investor will need to settle the outstanding balance on the margin account with the issuing broker, which may require selling another asset in order to make up the difference. For this reason, investors who tend to be somewhat conservative may choose to avoid going short and focus attention on investment opportunities that can be held over the long-term and generate returns on a more or less consistent basis.
