The concept of short selling shares is neither new nor unusual, having been around since the early days of share markets. Most stock markets and countries have rules and laws that regulate short selling.

A short seller borrows a company’s shares (from an investment bank or broker, for example) and then sells them, with the intention of buying them back at a cheaper price. Thereafter, the short-seller returns the loaned shares back to the lender and books profits from the transaction, as the figure below shows.

Mechanics of short selling

 

Please note however that there are risks associated with short selling. In particular, a short sale creates the potential for an unlimited loss as the price of the underlying security could theoretically increase without limit, therefore increasing the cost of buying those securities to cover the short position.

For further information about the risks of short-selling, please refer to the ‘What are the significant risks?’ section of the BlackRock Australian Equity Opportunities Fund PDS.

Click here for an example of short selling

Read more about the mechanics of short selling

 

Before deciding whether to invest in a long-short investment strategy, investors should speak to a financial or other professional adviser to ensure that they fully understand the risks associated with such strategies, including the risks associated with short selling.