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Another way to think of it is by understanding the difference...

  1. 318 Posts.
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    Another way to think of it is by understanding the difference between going long and going short.

    Going long is your typical trade, you buy the stock and you profit when the stock goes up because you can sell the stock at a higher price.

    Going short is the opposite, you sell the stock (without owning it) and you profit when the stock goes down because when you cover your short you can buy it back at a lower price than what you sold it for.

    Because when you borrow a stock to sell it (shorting) you owe the stock to someone, you need to buy back the stock at some point to return it. Theoretically, you can hold a short position open indefinitely however a lot of people short using margin accounts (it might be a requirement in fact, not 100% sure) so when the price of the stock goes up your short position is losing money and if the stock continues to rise, at some point your broker or bank will request more funds or force you to close out the position because your account's "balance" is below some threshold that their market risk team will determine.

    Practically speaking, people will cover their shorts when they think their prediction has gone wrong or if the price has risen beyond an acceptable level (of loss) for that trader. This also drives the price up further because they have to buy the stock to close out their short position which means more buyers.
    Last edited by Sceptical Prophet: 08/06/16
 
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