Legal Definitions - short

In finance, the term "short" refers to an investment strategy where an investor sells an asset they do not currently own, typically by borrowing it, with the expectation that its market price will fall. The goal is to buy the asset back later at a lower price, return the borrowed asset to its owner, and profit from the difference between the initial selling price and the subsequent repurchase price.

This strategy is often called "short selling" and is undertaken when an investor believes an asset is overvalued or its price is likely to decline. The investor is said to be "short" the asset, to have a "short position," or to "short" the asset.

• Example 1: An Individual Investor Betting Against a Tech Stock

  An investor, Maria, reads several reports suggesting that "QuantumTech," a popular software company, is facing significant competition and its upcoming product launch might be delayed. She believes QuantumTech's stock, currently trading at $200 per share, is likely to drop to $150 in the next few months.

  To capitalize on this anticipated decline, Maria decides to short QuantumTech stock. She borrows 50 shares from her brokerage firm and immediately sells them on the open market for $10,000 (50 shares * $200/share). If her prediction is correct and the stock price falls to $150, she will then buy back 50 shares for $7,500 (50 shares * $150/share), return them to her broker, and realize a profit of $2,500 (minus any borrowing fees or commissions). In this scenario, Maria is "short" QuantumTech stock because she sold shares she did not own, expecting to buy them back cheaper later.

• Example 2: A Hedge Fund Predicting a Commodity Price Drop

  A hedge fund, "Global Macro Investments," conducts extensive research into the global supply chain for industrial metals. Their analysis indicates that a new, highly efficient mining technique is about to be widely adopted, which will significantly increase the supply of copper and likely drive down its price.

  Based on this forecast, Global Macro Investments takes a short position in copper futures contracts. This means they enter into agreements to sell a large quantity of copper at a future date at a price agreed upon today, even though they do not currently own the copper. They are betting that when the delivery date arrives, the market price for copper will be lower than their contracted selling price, allowing them to buy the copper cheaply on the open market to fulfill their obligation and make a profit. Their "short position" reflects their expectation of falling copper prices.

• Example 3: An Analyst's Negative Report on a Pharmaceutical Company

  An influential financial analyst publishes a scathing report on "MediCare Innovations," a pharmaceutical company, alleging that its flagship drug has serious undisclosed side effects and that the company's financial projections are overly optimistic. This report causes widespread concern among investors.

  Following the report's release, several institutional investors and traders decide to short MediCare Innovations' stock. They borrow shares from other investors and sell them immediately, anticipating that the negative news will cause the stock price to plummet. Their strategy is to buy back the shares at a much lower price after the market reacts to the analyst's report, return the borrowed shares, and profit from the difference. By "shorting" the stock, these investors are actively betting against the company's future performance and stock value.