I learned something new today.
Thought I should share it here for those who, like me, are into trading and still haven’t gone past the basics.
It’s about the difference between SHORT SELLING and MARGIN TRADING.
The reason I came across these terms is that I was wondering how some traders are making a profit in a bearish market. I heard about short selling and I kind of understand how it works now, but then I came across another term—margin trading—which has a few things in common with short selling.
To those of you who don’t know what short selling is, it’s basically selling securities or cryptocurrencies when the price is high and buying them back when the price falls. You make a profit from the change.
But isn’t that how trading generally works—sell high, buy low? Yes, but that’s different. In short selling, you don’t own the securities or cryptocurrencies you are selling. You borrow them from a broker. This means that you can literally sell something you don’t have in your wallet. The broker lends you the asset, you sell it, buy it back, and then return it to the broker.
Margin trading, on the other hand, is similar to short selling in that you also borrow from a broker. But you’re not borrowing securities or cryptocurrencies to sell and buy back when the price drops. Instead, you are borrowing money to buy securities or cryptocurrencies to sell when the price rises.
When you short sell something, the broker usually only expects you to return what you owe them. When you do margin trading, you pay interest for the amount you owe.
Margin trading allows you to make LONG POSITIONS (traditional trading approach), while short-selling allows you to make (you guessed it) SHORT POSITIONS.
Short selling is riskier than margin trading because your potential loss is bigger (even unlimited in some cases, as most assets tend to appreciate). And the only way to close your short position is to buy back what you sold. If the price stays above your selling price, you’ll lose.
BTW, you won’t earn much by short selling during a bear market. You can earn bigtime by short selling before the bear market even starts. Please let me know if I got it right. I might be talking gibberish and not helping.
TIA
