[MUSIC] In this video, we will discuss what short selling is and how you will use a stop loss order to restrict your losses after you have short sold shares. Last time, we assumed that you buy shares and then restrict your losses by placing a stop loss order to sell. The opposite is also possible. Say you have information that the stock price is going to drop. Ideally, you would want to sell the shares now and buy them back after the stock prices drop. How about if you do not own the sales? Can you sell on the information that the stock price is going to drop? The answer is yes. Through what is called short selling sales. And essentially short selling means that you are selling something that you do not own. How do you do that? By borrowing shares from someone and selling them with a promise to return the borrowed shares at a future date. This is similar to taking a loan. In a loan you borrow cash and promise to pay back at some future date. In the case of short selling, the loan is for shares not cash. Various countries have regulations on how this borrowing may be done. Some countries may completely ban it, while others may ban it from to time for various reasons. You will have to check if and how you can borrow shares on your local exchange. I do want to add a word of caution here that short selling is extremely risky because stock prices in general increase over longer horizons of time. It is not meant for everyone, and also not advisable to hold such positions over long periods of time. Let's say that you expect the share price of XYZ to decrease. Because you don't own shares of XYZ, you decide to short sell shares in XYZ. You're able to short sell 100 shares at $40 a share. If your information is right, then prices will decrease, you will buy the 100 shares back at a lower price, and return the borrowed shares. However, if you're wrong, their prices may increase leading to losses because you still have an obligation to return the borrowed shares. You will have to buy the shares back at higher prices, which results in losses. To prevent really large losses on account of price increases, you enter a stop loss order to buy 100 shares at $44 a share, you're willing to lose around 10% on this transaction. As long as the stock trades and prices below $34, your stop-loss order to buy is a trigger. However, the moment the stock trades at $44 or higher, it will trigger your stop-loss order, which will convert to a market order. And will try to execute against limit orders in the order book. Remember, a stop-loss order at $44 doesn't guarantee purchases at $44 alone. The order is activated when the stock price reaches $44. The actual price at which you buy the shares may be greater than, or less than $44. There is still price uncertainty, and this is especially higher when prices are changing rapidly. To reduce this price uncertainty, you could place a stop loss order with a limit price. When triggered, this would send a limit order to the market which will try to execute against the order book subject to not exceeding the limit price. Although it is common practice to place stop loss market orders rather than stop loss limit orders, because there is some urgency in getting the order executed. We will continue talking about different types of orders our traders may place in the market next time. We will look at various additional instruction you may attach to an audit. [MUSIC]