Question

c. Explain why an investor might want to engage in short selling? It is sometimes said that short selling is riskier than holding a long position. Is this true? Explain.

Answer 1

Short selling means investor taking the short position does not own that shares but he borrows shares from the another investor.

The main reason why investor wants to engage in short selling is that considering the market situation and the analysis made by the investor he is of the opinion that the market price of shares will fall in the long run or future and he thinks that at that time he will buy the shares at low price and give it back to lender from whom he borrowed and in this way he can book profit.

Yes this is true short selling is riskier than holding a long position as in case of short selling investor borrowed shares for certain period and if security price increases instead of fall and in this scenario he has no option left he has to buy shares at such higher prices in order to return to the lender.However in case of long position he has option to hold the share untill there is rise in the price of the shares as he don't have to return it to anybody.