Short Selling in the Forex Market
grudzień 7th, 2011Many investors always prefer to use conventional methods of investing in which they buy an asset for a certain period of time and then sell it off at higher rate. Many investors use these ways for parking their surplus funds. However, many new methods have been introduced in the market for making money and one of these new methods is short selling. Short selling is not liked by all, as many investors believe in investing by buying first and selling later which is quiet contrary to short selling.
In simple terms short selling is basically selling an asset which the seller does not own. The seller here borrows the asset from the asset owner and sells it in the market at the current market rate. The rational behind this kind of selling is that, the seller here believes that the market price of that particular asset is stretched at the moment and would come down in a certain period of time. After a period of time when the price of that asset cools down, the seller can purchase the asset from the market and return it to the actual owner.
In forex too many traders indulge in short selling when they believe that the price of a certain currency is far beyond their intrinsic value and the price hike is purely due to the market speculation. In order to indulge in short selling in forex market the seller here must be absolutely sure that the fundamental value of the currency is far less than the market value otherwise the seller would be at loss because after a time period the seller has to purchase back the asset at the market price in order to handover the asset to the actual owner.
It is important that the seller is well aware about the forex market and the fundamental value of the currency which would help them to have a clear understanding regarding the currency prices. Market speculation is the prime reason which drags the currency price far away from their economic value. Traders who are well aware of these speculations make a killing by carrying out short selling.
Short selling also becomes very important because there are many investors who make their financial decisions based on greed rather than sound analysis. These investors do not know when to sell and thus miss out a great selling opportunity when the market prices these currencies irrationally. Short sellers can use this opportunity by borrowing assets from them and return them at a later stage.