Shortholding

Shortholding is a term used in finance to describe the act of selling a security that one does not own, with the expectation that the price will fall. This is also known as short selling. The seller borrows the security from a broker and sells it on the open market. The seller then waits for the price to decrease. If the price falls, the seller buys back the security at the lower price, returns it to the broker, and pockets the difference as profit.

However, short selling carries significant risks. If the price of the security rises instead of falls, the short seller will have to buy it back at a higher price, incurring a loss. In theory, the potential losses are unlimited, as a security's price can continue to rise indefinitely. This contrasts with buying a security (going long), where the maximum loss is limited to the initial investment.

Short selling can serve several functions in financial markets. It can increase liquidity by adding more sellers to the market. It can also help in price discovery by identifying overvalued securities. If many investors believe a stock is overvalued, they may engage in short selling, driving down its price to a more accurate valuation. Regulatory bodies often monitor short selling activity to prevent market manipulation and ensure fair trading practices.