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What does it mean to be ‘Short’ on something?

Selling shares or any asset without prior ownership is someone ‘shorting’ the market; that is hoping it will go down and be profitable before delivery is required.

Shorting a market is seen as a demonstration of low confidence in it because you perceive it as going down, either because you believe it is currently over-priced, or you foresee a major event which will see the asset fall in value. There have been numerous famous ‘short’ calls.

When the UK pound looked set to exit the European Exchange Rate Mechanism in 1992, George Soros famously shorted it, making an alleged $1 billion in the process. More recently John Paulson of Paulson & Co foresaw the coming financial crash of 2008 and shorted mortgage-backed financial assets, selling them before they went into free-fall.

Currencies often see short calls because their fortunes are tied to those of nation-states, whose actions might be easy to predict. In large enough volume, short calls can be perceived as steering the price as if enough investors believe something will drop in value it is likely to do so.