Normally, we earn money at stock markets when the price of shares, we own, increases. For example: assume that I buy 1000 shares of Company A at a price of $1 per share. After few months, assume that the price of this company’s share increases from $1 to $2. Now if I sell these shares, I will get $2000 where I had bought these shares for $1000. So how much money did I make? I made $1000 for this 1000 shares transaction.
But in future market, we can sell company’s shares which we actually do not own. For example: assume a company named, Future-A, whose shares we can trade in the future market. I own no shares of this company but in the future market I can directly sell shares of this company and later on, I can buy the shares I which I had sold.
Assume that I sell 1000 shares of the mentioned company, Future-A, at $4 per share. After 2 months, the share price reduces to $2. Now if I Buy 1000 shares of this company, then I will earn $2000 because I sold the shares at $4/share [which means that someone bought the shares I sold for $4000] where now, I have bought the same number of shares for $2 per share [which means that someone else has sold the same amount of shares, 1000, at $2 per share].
So I sold the shares at a higher value and then I bought the same number of shares for a lower amount of money: thus I earned $2000 profit in this transaction.
This type of trading is the opposite of normal trading. In normal trading we first buy a share and then we sell it where in future trading, we can first sell the shares and later we can buy them
This type of trading in the future market, where we first sell and then buy the shares, is called Short Selling.
