Stock Market

r/StockMarket – How does short selling bring the price down?

Hi,

How does short selling bring the price down? I have created a simple diagram that shows my understanding of short selling:

Short Selling

Why would this eventually bring the price down?

In case you want to edit the diagram, here’s the source code:

@startuml

title "Short Selling"

autonumber

database "Market Maker" as MM
actor "Trader 1" as T1
actor "Trader 2" as T2


T1 -> MM: I want to borrow N shares of S
MM -->> T1: Sure! The interest rate is %5
T1 -> MM: Deal!
MM -->> T1: Here are your shares
T1 -> T2: I have N shares of S to sell at market price
T1 <<-- T2: Noice! I want to buy them
T1 -> T2: Here you go
T1 <<-- T2: Thanks!

@enduml

And you can edit it here: https://www.planttext.com


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