What is Short Selling? | By Laurent Bernut | Quantra Courses | Python in Trading

Welcome to this video lesson on short selling. In this video you will learn how to Define short-selling Short-selling describes the action of selling an asset which you do not own. When you are shorting you first sell the asset and then buy it back at a later point of time. The aim of a short seller is to make money from the price decrease of a stock. While short selling a stock, you must first borrow the stock from the broker’s inventory and then sell it in the market. If you are in the Long/Short business, you need to come up with a consistent supply of short ideas. You cannot afford to wait for the market to tank to start populating the short book. Every index is either the market cap or price average of its constituents. This means that roughly half the stocks will outperform the index while the other half will underperform the average. Simply said: “A rising tide lifts all boats, but they do not travel at the same speed” Let us understand how this speed varies with the help of an example. This is an image of the S&P500 and a simple count of outperformers and underperformers using a method we will see in detail further along the course In the picture, as the S&P500 rose from its lows in 2019 the number of underperformers and outperformers did not vary much over time. While the number of stocks on each side remains fairly balanced, the names changed. This is a phenomenon called sector rotation. Some stocks, industries and sectors do well in the early, middle or late stage of a market and then pass the baton to others. In the next unit, you will learn about the long-short strategy, where short selling is extensively used.

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