Posted on 03 July 2012.
Traditional investing strategies require buying low and later selling high to produce profits, and a short sale investor profits the same way, only in reverse order. Conventional wisdom says that something must be owned in order to be sold. This is not always the case. A short sale investor will sell an asset expecting the value of that asset to drop in the future, where he will be able to buy it back at a cheaper price. The fundamental principle of buying low and selling high produces profits in either direction.
All financial transactions must have a buyer and a seller. When there are more buyers than sellers in a given market, prices increase. Eventually, this trend will stabilize when there are an equal number of buyers to sellers. A short sale investor will seek financial assets that are in high demand and sell these assets with the expectation that demand will diminish allowing him to purchase the asset at a lower price. The difference between the original sale price and the later lower purchase price is profit.
This strategy allows investors to generate profits regardless of whether the market value of an asset is rising or falling. When the value of an asset is rising, traditional strategies of buy now and sell later produce gains. When the value of an asset is falling, selling first and buying later is the profitable approach. Financial markets are fluid instruments that demand that investors take a position on both sides of every transaction. Every buyer needs a seller, and every seller needs a buyer. The short sale investor balances the market by providing the counterweight to market influences while profiting from falling prices.
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