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short or ‘to go short’

When an investment is setup such that it will profit if the price of something goes down. It can be a profitable strategy (i.e. “shorting” the oil price in 2014 would have yielded a big profit), but the potential loss is infinite. That’s because in order to close out a short position, an investor must buy back the investment. Since the price of oil or a stock or any other investment can go up an infinite amount, it can be extremely costly to be wrong when shorting something (as opposed to going long something, which has a maximum loss of 100% of your investment). Think: if you short oil at $50, but buy it back at $150 then you will have lost $100 (150-50 = 100) – and that’s a 200% loss. So, the big potential loss often leads to “short covering” (see below).

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