Translation: البيع على المكشوف = Short Selling

Short selling is an investment strategy in which an investor sells a security they do not yet own after borrowing it, expecting its price to fall. The investor then aims to buy it back later at a lower price and return it to the lender, profiting from the difference.

In simple terms:

In conventional investing, an investor buys first and waits for the price to rise before selling at a profit. Short selling reverses the order: the investor sells first and buys later. So, if the price falls between the sale and the repurchase, the investor benefits from the price difference.

Note:

Short selling does not mean that an investor owns a stock and then sells it; the investor sells a borrowed stock. The risk also differs from that of conventional investing: if the stock price rises instead of falling, this can lead to significant losses.

Example:

Suppose an investor borrows 1,000 shares and sells them for 50 riyals per share, receiving 50,000 riyals. If the share price falls to 40 riyals, the investor buys the same shares for 40,000 riyals and returns them, making a profit of 10,000 riyals before costs.

But if the price rises to 60 riyals, the investor will need to pay 60,000 riyals to buy back the shares, incurring a loss of 10,000 riyals before costs.

What does this mean for you?

Sell before buying: This differs from conventional investing: the investor starts by selling and buys back later.

Profit from a price decline: The investor benefits when the price of the security falls between the time it is sold and bought back.

Risk in the opposite direction: If the price rises, buying back the security becomes more expensive.

Borrowing is essential: The transaction can only take place by borrowing securities in accordance with applicable regulations.

A tool with a role in the market: In addition to being used as an investment strategy, short selling can help improve pricing efficiency and market liquidity.

Frequently asked question:

Why is it called “short selling”?

Answer: Because the investor sells a security they do not own at the time of the sale. Instead, they borrow it first and then sell it, hoping to buy it back later at a lower price.