What is short-selling really?

In the recent time there has been A LOT to pay attention to for both traders (like myself) and long term investors (like the people managing my pensions). Where can you start in preparing yourself for times like this? What about the time to come?

Lets begin with one of the most common words in these times, "Short-Selling". Short-Selling as a tool can be described quite simply, but the right application of this tool in a portfolio is highly complex and best left to professionals or investors who have time and motivation to put in the effort to educate themselves.

Some sources describe ways to play defensively and ways to secure your assets in turbulent times. It is VERY important to realize that short-selling and other aggressive alternatives I look at are only applicable for the trading part of my capital. There is a huge difference between playing defensively and protecting your assets and playing aggressively to build your capital in any market situation.

If you are preparing for good times or for bad times, never think that you can outsmart the market. The market consists of many, many investors collectively trying to outsmart the market. Why would you manage your money as if YOU are the ONE investor who will beat the market.
"Shorting" is another, less descriptive word for Short-Selling. You are essentially selling an equity that you do not own, and buying it back at a later time. You borrow it from someone who owns it, sell it, buy it back and then return it to the owner. The aim for the short seller is to sell it now and buy it later at a lower price, a "bet" on the equity dropping in value from the time of sale to the time of purchase. Buy low and sell high, just in reverse order.

This is made possible through borrowing someone else's shares, executing the sale of their shares, then buying new shares and returning them to the owner at a later time. For the owner of the shares, there will be no difference in the value of the equity and the return of the shares is guaranteed by the broker facilitating the short-sale. Investors are offered a premium for lending their stocks to short-selling and this can help long-term investors reduce their losses over time to some extent.

My advice is to stay away from short-selling and other similar tools unless you read up more on it and truly understand the underlying risk. The theoretical risk is infinite whereas the risk when buying a stock is limited by the company going bankrupt and you lose all the invested capital.

More sources if you still are wondering about this financial principle: