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Every decision you make for your store affects the customer experience, from pricing and product selection to checkout flow and protecting against common eCommerce threats.

By understanding the key eCommerce principles, such as building credibility, marketing strategies, and product reviews, you'll be able to create an outstanding website that sells.

In this article, we'll share 10 eCommerce basics that your online retail store must get right.

While it’s important to keep up with the latest eCommerce trends, you need to get the basics right before you can start branching out. Here are 10 basics retail startup owners need to know.

1. Focus on the Customer

Even when you have similar products or services to the competition, you can still differentiate yourself with customer service. Make it easy for customers to purchase your products on your website. Be sure to simplify the checkout process and make your website easy to navigate.

2. Build Credibility

Build a credible brand by providing useful and informative content on a blog. Take time to create a strong and interesting “About Us” page, so customers can learn about who you are and what you do. Networking with people and brands in your niche can also improve your credibility.

Keep in mind that the people you work with can also negatively affect your credibility, and you need to do what you can to vet any potential business partners or influencers first.

3. Merchant Account

Having your own merchant account is critical for processing orders on your eCommerce store. Make sure to research different payment processors and find one that can offer good credit processing options. Don’t charge any personal expenses to your merchant account.

4. Marketing Strategy

Have a plan for promoting your website and products or services. Invest in marketing to get the word out about your business. Consider utilizing search engine optimization (SEO), display advertising, social media marketing, and content marketing to increase your online visibility.

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Many businesses fail because they don’t have enough money for marketing or advertise to the wrong people. If you’re on a budget, an SEO strategy can be cheap but very effective.

5. Pricing

Price your products competitively. Price too low, and you’ll make little to no profit. Prices are too high, and you’ll discourage customers from buying. Do your research to find the right pricing strategy for your products. Ask yourself if your niche is willing to pay a premium for your products.

6. Shipping Strategies

Provide quality and secure shipping to ensure customer satisfaction. Make sure customers know how your products will be shipped and how much they'll cost. Offer low-cost shipping options, such as a flat rate, if it makes sense. Allow customers to track their shipments.

7. Delivery Times

Be upfront about delivery times. You don’t want customers waiting an unreasonable amount of time for their orders to arrive. Be realistic with delivery times. 46% of customers rank reliability as the most important factor when deciding to buy and remain loyal to eCommerce brands.

Keep in mind that most customers are fine with waiting a while to receive their packages as long as they’re expected to wait. If you don’t have the resources for same-day delivery, don’t offer it.

8. Security

Ensure that your website is secure. Invest in payment gateway software, such as SSL, to protect customer data. Consider data encryption for customer info. If you have employees, train them on how to detect and avoid phishing scams, as human error is the prime cause of hacks.

9. Competition

Research your competition to understand the marketplace. Know who your competitors are and keep track of their pricing and promotions. Look at your competitors' biggest fans and see what they like and don’t like about their favorite brands. See what you can do differently or better.

10. Product Reviews & Reviews Management

Reviews increase customers’ trust in your brand, so ask happy customers to leave testimonials on your website and other 3rd-party sites. If you write up a script for customers (or provide short prompts), you can make sure your customers are representing you in the best way possible.

Market Mechanics: Retail Sales Explained

Retail sales are often measured as a metric of economic health, as consumer spending makes up a large portion of gross domestic product (GDP). The retail sector comprises many goods, including apparel, electronics, home furnishings, and groceries. In terms of overall retail sales growth, clothing has been one of the most lucrative components in recent years. Apparel retailers have significantly benefited from the rise in online shopping and mobile payments, increasing consumer spending on clothing items. 

Electronics also account for a significant portion of retail sales growth due to their increasing popularity among consumers. Home furnishings have also seen steady growth over time, while grocery stores have remained fairly stagnant. Now that we have established what constitutes retail sales growth, let's discuss seasonal trends and cycles with retail sales. Seasonal tendencies are typically caused by shifts in consumer demand due to external factors such as weather or holidays. For example, winter months tend to be slower for retail stores since consumers usually spend less money during colder temperatures; however, this can vary depending on location and industry type.

Additionally, certain holidays like Christmas typically see an uptick in consumer spending due to gift giving, leading to higher revenue levels for retailers during these times. Cycles also play an essential role in understanding how trends influence retail sales performance. Business cycles are periods where economic activity fluctuates between expansion and contraction phases over time; these fluctuations directly impact consumer confidence levels, affecting their willingness to purchase products from retailers. Long-term macroeconomic conditions can also influence purchasing decisions, leading to changes in overall market demand for specific goods or services offered by retailers.

U.S. Retail and Food Services (CB22-184) & Inflation-Related Adjustments

Source: Census.gov - https://www.census.gov/retail/marts/www/marts_current.pdf

 

Governments measure retail sales growth monthly to gauge the economy's health and consumer spending habits. This helps indicate how well businesses are doing and whether consumers have enough disposable income to purchase goods and services. Retail sales influence macroeconomic activity because when consumers increase spending, this can lead to increased economic output and foster a favorable business climate. 

Inflation is factored into retail sales figures to account for changes in the purchasing power of money over time. In other words, it considers how much more expensive items may become due to inflationary pressures such as rising costs of labor or production materials. To adjust for inflation, economists use price indices that track changes in prices between different years to accurately compare changes in real terms (i.e., what has been purchased). This helps ensure that retailers are using their revenue effectively due to changing prices.

Although inflation does affect the accuracy of specific statistics, such as retail sales growth, economists can account for these fluctuations by using price indices which allow them to compare changes in real terms (i.e., what has been purchased). This helps ensure that retailers aren't overestimating their revenue due solely to changing prices alone while providing an accurate assessment of overall market conditions over time.

The price index formula is used to account for retail sales inflation. This equation considers changes in money's purchasing power over time, allowing economists to compare changes accurately in real terms (i.e., what has been purchased). 

The formula is as follows: 

Price Index = (Current Price / Base Year Price) * 100

In this equation, the "current price" refers to the current cost of a specific item or service, and the "base year price" is its cost at some point in history. By dividing the current price by the base year price and multiplying it by 100, economists can determine how much an item's nominal value has changed due to inflationary pressures such as rising labor or production materials costs.

Feeling the Impact of Retail Sales Growth

Retail sales figures directly affect everyday customers by providing a measure of economic health. When retail sales are strong, this typically indicates that consumers have enough disposable income to purchase goods and services, leading to increased economic output and fostering a favorable business climate. On the other hand, when retail sales are weak, it may suggest that consumers lack the confidence or resources to make purchases which could result in lower overall GDP growth. 

For individual customers, understanding changes in retail sales can provide valuable insight into current market conditions. For example, knowing how much people spend on certain items or services can help inform purchasing decisions and ensure that customers get the most bang. Additionally, tracking macroeconomic trends such as inflation or unemployment can also help assess whether it is an excellent time to buy certain products or services due to changing prices or the availability of jobs.

Summary

In conclusion, several key factors influence seasonal trends and cycles with retail sales, including external factors like weather or holidays, along with long-term macroeconomic conditions like business cycles that affect consumer confidence levels and purchasing decisions over time. Therefore, understanding these trends is essential for predicting future performance to stay competitive in the ever-changing retail sector.

No matter what it is you need to do, there’s an app for it. This rule applies to everything from dating to business, and the investment sector is no exception.
Investing apps have become increasingly popular over the past couple of years. Their appeal is easy to understand, in that they’re consumer friendly and have opened the markets up to ordinary people. We look at the factors behind their emergence and whether or not they’re here to stay.

An app for everyone

In our modern world, those looking for the best investment apps will find themselves spoilt for choice. There are so many out there that entire web pages exist to help consumers sort the wheat from the chaff. These review sites rank and rate options based on various factors, including platform fees and commission amounts.
There’s an option for everyone, and it’s a good job because according to the Financial Times, retail investors accounted for one-third of stock market trading in 2021. Those taking advantage of investment apps made up a sizeable portion.
The growth in retail trading undoubtedly goes hand in hand with the rise in investment apps. It, in turn, is explained by the pandemic. With more people at home in 2020, and most of them having additional time on their hands, many explored new pastimes. Investing, and the chance to create a secondary income stream appealed to many.
This new breed of inexperienced investors naturally required certain things from the platforms they used – first and foremost, easily accessible advice and the ability to learn on the go. Many also had less capital behind them than traditional traders, meaning they wanted to be able to trade at low volumes and with minimal fees involved.
Enter mobile apps, which did away with the need for brokers, banks, and the high costs that have traditionally come with the two.

A burgeoning market

If there’s one thing we can take away, it’s that the burgeoning popularity of retail investing apps is down to a perfect storm of factors. This has seen app usage increase from 35.6 million in 2017 to more than 150 million in 2021.

So, what have user-friendly apps and lower trading costs meant for the retail investor? Access to global markets for the first time. With the cost and complexity of traditional investing removed, it’s easier than ever for traders to invest in stocks and assets without the need for a middleman. This means even lower-income individuals can profit from trading in a way that simply wasn’t possible before.

According to Deloitte, this new breed of trader has a notably smaller bank account than previously – but that doesn’t stop them from being active on the markets. They’re also less reliant on professionals for financial advice.

While some remain uncertain of the long-term effects of this shift, our personal opinion is this: anything that improves access to the markets for the ordinary man or woman and puts us all on an equal footing can only be a force for good.

Business rates apply to most non-domestic properties, including restaurants, pubs, cinemas, theatres, music venues, hotels, and gyms. The 50% discount is a tax cut worth £1.78 billion, the largest single-year cut to business rates in 30 years, except for the emergency pandemic reliefs. 

In his Autumn Budget and Spending Review speech, the Chancellor of the Exchequer said that abolishing business rates altogether would be an irresponsible move, as they generate £25 billion for the economy. However, Sunak said that to make business rates fairer, they will be re-evaluated every three years.   

Properties that are eligible for the discount will receive up to 50% off their bill, subject to a cap of £110,000 per business. This is more than double the relief announced pre-pandemic for the 2020-21 financial year.

Turning to Twitter, Sunak said the move was “a tax cut worth almost £1.7bn and with Small Business Rates Relief over 90% of all these businesses will see a discount of at least 50%. Taken together, today we cut business rates by £7bn.”

"We’re taking steps to ease the burden of business rates and boost our high streets [...] Without action, millions of businesses would see their tax bills going up next year because of inflation,” Sunak continued, “So I’ve decided that next year’s planned increase in the multiplier will be cancelled. That’s a tax cut for business worth £4.6bn over the next five years."

On Tuesday, Stripe, which supports businesses in accepting online payments, said it had agreed to a strategic partnership with Klarna to offer its “buy now, pay later” payment method to Stripe’s merchants. Koen Koppen, Klarna’s chief technology officer, said, “Together with Stripe, we will be a true growth partner for our retailers of all sizes, allowing them to maximize their entrepreneurial success through our joint services.”

Stripe says that the agreement will make it easier for retailers to add Klarna as a payment option on their website. Klarna usually partners with retailers directly to embed its checkout button on their sites. However, the agreement with Stripe could give Klarna a much wider client reach. The Swedish fintech generates revenue through deals with retailers, which pay it a small cut on each transaction processed via its platform. 

According to Stripe, early results reveal that merchants experienced a 27% increase in sales on average after integrating with Klarna. The average order value, meanwhile, increased by 41%. 

Critics of “buy now, pay later” platforms have accused companies such as Klarna of encouraging customers — often people who are young or on lower incomes — to spend money on items they cannot realistically afford. In the UK, the government has introduced proposals to regulate the industry in order to protect consumers from potential financial harm.

High streets around the world have been in decline for many years, with the likes of Amazon as well as other online retailers squeezing many high street vendors and retailers out of the market. Recently however, with people making the switch to home working, things may be changing.

All retailers have been susceptible to the huge rise of online shopping and the COVID-19 pandemic has only accelerated this.

Illya Shpetrik, a USA-based fashion and entrepreneur, has commented on this, saying: “Online retail, be it in fashion or otherwise is of course here to stay. However, people remain keen on their local high streets, which serve an essential purpose. The local high street has changed and adapted itself over many years and will hopefully be here to stay.”

Illya Shpetrik continued: “Online retail and physical stores and shops on the high street will ultimately learn to co-exist side by side. They will both always be there in one form or another. They also relate to certain value we all have. For example, growing up, in the Shpetrik household, we always went to our local grocery store for certain items but to the larger retailers for other goods. This is how high streets and online retail will likely learn to co-exist.”

With more people than ever working from home and with people’s savings and disposable income in the UK and around the world growing, there are billions of pounds and dollars waiting to be spent. Significantly, with people changing so many of their daily and work habits as a result of the changes to how and where we work, it is city centres which are feeling the greatest pinch.

City workers are not in town and city centres in anything close to the numbers they were throughout 2019. However, although many habits and practices have changed as a result of how we are all now working, hose who would go out daily in busy city centres to buy food and other items may still do so in their local high streets. Therefore, at least a portion of what they would otherwise have spent is being spent in local high street shops as well as online.

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Many people have also seized the opportunity of having to work from home and changed their place of abode and work entirely. Co-living spaces, for example, are increasing in popularity, with many empty city centre premises being transformed into innovative co-living and co-working spaces. A key benefit of these spaces is that with micro-communities under one roof, work, business and leisure are combined conveniently in city and urban centres.

This is a significant shift in people’s work-life balance, with people turning to city and town centres to live as well as work in a way never seen before.

On this, Illya Shpetrik commented: “Everything has, in a sense been turned upside down. Previously, it was work in the city centre and live and relax in suburbs and in and around local high streets. This has however become skewed in recent times with co-living spaces for living and work springing up in city centres and shopping now taking place like never before, once again, on high streets.”

Non-essential shops and services have reopened across England and Wales as lockdown rules are eased across the UK.

Gyms, hairdressers and zoos can now reopen, while pubs and restaurants are able to host customers in outdoor areas. Prime Minister Boris Johnson has urged people taking advantage of the eased restrictions to “behave responsibly” and continue to exercise advised steps to reduce the likelihood of contracting or spreading coronavirus.

Non-essential shops have been closed since 5 January when a third national lockdown was announced in England and similar measures imposed across the devolved nations. This new easing of restrictions coincides with the relaxing of Northern Ireland’s stay-at-home orders and other restrictions in Scotland and Wales.

58% of small businesses predict that their performance will improve this quarter as a result of these slackening restrictions, the highest proportion since the summer of 2015. Conversely, fewer than 24% anticipate a fall in sales.

“We’ve seen a phenomenal increase in bookings since the government confirmed restaurants can open on Monday,” said Patrick Hooykas, managing director of TheFork, formally known as Bookatable. “This week alone we’ve seen an 88% uplift in bookings.”

The pound also opened the week holding steady following heavy losses in the days prior. The GBP/EUR exchange rate fell over 2% over the past week before settling at €1.1514 on Friday.

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As of 05:16 UTC on Monday, GBP/EUR was trading -0.03% at €1.1509.

More than 32 million UK residents have now received a first dose of a COVID-19 vaccine. Last Sunday saw a reported seven deaths within 28 days of a positive COVID-19 test, the lowest daily total since 14 September.

New research has found that average women in their twenties today will have £100,000 less in their pensions than their male peers upon retiring.

The report was produced by pensions firm Scottish Widows to coincide with International Women’s Day, which found that women in the first 15 years of their careers on average save about £2,200 a year, compared to £3,300 for their male counterparts.

Lower average earnings, part-time work and the need to take time out of employment to care for family all cut into savings and are setting women back by almost four decades compared to men, the firm stated. The average young woman today will need to work 37 years longer than a man to reach “retirement parity”.

The COVID-19 pandemic has further widened the gender pension gap, the firm continued. 36% of employed women under the age of 25 work in areas such as hospitality and retail, which have been among the sectors hardest hit by the health crisis, and over 49% have been furloughed.

"We know that young women have been some of the hardest hit by the short-term financial impact of the pandemic and this has only exacerbated the challenge of reaching pensions parity,” said Jackie Leiper, Scottish Widows’ managing director of pensions.

However, the firm found that if women could increase their pensions contribution by 5% from the beginning of their careers, they could almost completely close the gap by the time they retire.

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“By taking control of their contributions and increasing them as early as possible, young women stand a fighting chance of improving their long-term savings outlook,” Leiper said.

A spokesperson for the Department for Work and Pensions drew attention to the government’s pension reforms and increased pension participation among women in the private sector, which rose from 40% in 2012 to 86% in 2019.

The retail sector has faced unprecedented challenges as a result of the ramifications of the pandemic. Recent news that UK retail figures fell by 1.3% in January, combined with new COVID variants, indicates a rocky road ahead for retailers as the pandemic continues to hamper customer spend and business survival. However, hope is in sight. Shoppers continue to migrate online and retailers that invest in omnichannel and digital initiatives will be poised for recovery and growth in the months ahead.

To enable this, brands should be exploring strategies that provide cost flexibility and resilience in another unpredictable year. To safeguard with a passive approach will be risky, and to overinvest in the wrong places would be equally detrimental to overall cash flow. The key will be to leverage financial management tools that present real-time data and provide valuable insights enabling agile actions. This includes providing visibility over costs for a proactive and sustainable way to free up liquidity and invest in the future.

Ronnie Wilson addresses the five investment opportunities retailers cannot afford to miss in 2021.

  1. Pursuing an omnichannel approach

COVID-19 restrictions and subsequent lockdowns forced consumers into the digital realm for much of 2020, and this seems set to continue this year. Those who were reluctant beforehand may have come around to exploring its ease and immediacy. And retailers’ value-add offerings – in the form of chatbots, augmented reality and email promotions – seem to have encouraged more to convert to online shopping.

However, retailers should be prepared for a rebound effect, should health restrictions lessen later in the year. Despite all modern gadgets and tools, personalisation needs are still best met in person in a store, and many shoppers will have missed this physical experience. For businesses, the answer lies in balance, and not putting all their eggs in the online basket. Consumers supporting local bricks-and-mortar premises may well trigger a wider high-street resurgence, and to ignore investment into improving that area would be a big mistake.

  1. Personalisation online as well as in-store

If there is to be a balance in how people shop in 2021, there will be an expectation that retailers provide the best of both worlds either way. This means personalisation. Shoppers will want the same variety and immediacy in-store as they get online, and they will want the same level of customer service online that they could get in-store. This is why the balance is so important, and why investment into tools that fulfil demand on both sides needs to be factored into the budget.

A prime example that businesses should be exploring is augmented or virtual reality. If consumers are forced into making purchases of items like furniture or clothing without seeing them in the flesh, then this AR compromise can still facilitate that to a high degree of success. Online chatbots, or self-service in-store systems, will also provide what customers really want – which is choice.

  1. A targeted approach amidst fierce competition

While there will of course be exceptions, most retailers will be facing similar pressure points this year, and consumer trends will largely point in the same direction across verticals. Therefore, it should be expected that competitors will respond in similar ways, and it will be a challenge to differentiate.

The ability to stand out from the crowd once again comes down to that all-important buyer-seller relationship. When consumers’ budgets might be strained by outside events, they’ll likely turn to someone they can afford, someone they can trust or someone who’s bringing them the best deal.

Investment into AI-driven market analysis and forecasting can put you ahead in this regard, resulting in more targeted adverts, promotions, offers, rewards or loyalty programmes. Weighing up ROI as part of this process all hinges on data.

  1. Leveraging sustainability as a strategic differentiator

Sustainability should be a primary concern for retailers for two reasons. Firstly, because ethical, environmentally conscious and socially aware behaviours are the right way to conduct a business, and it has become an industry differentiator as such. Secondly, because consumers now demand it. If they want their products to be ethically made and sourced, then they’ll also want them delivered in the most sustainable way possible. High-profile awareness of waste materials, the condition of our oceans and general climate change means that a failure to consider distribution strategies and footprints will alienate a lot of consumers. It’s therefore a revenue-based decision to invest in more sustainable operations.

  1. Overcoming the COVID-Brexit-recession triple threat

The final challenge represents the social climate that businesses will continue to face in 2021. The UK’s COVID-Brexit-recession triple threat means even more unpredictability. It means the prospect of consumer trend fluctuations, mixed with the possibility of more entrenched economic difficulty.

This nexus of concern showcases once and for all the need for flexibility in investment strategies. Preparing cash flow for proactive expenditure in areas that cover the must-haves – technological tools like AR, omnichannel improvements, supply chain sustainability and relationship building – will hopefully bring about the returns retail businesses leaders need to then be nimbler for when unforeseen circumstances arise.

Smart investment for the future

As the financial and economic effects of the pandemic continue to put a strain on businesses in the retail sector, it’s vital that companies take a strategic investment approach. Freeing up liquidity through a successful business strategy is the most proactive and sustainable way to navigate ongoing uncertainty and pave the way for growth on the other side. Retailers must utilise the financial management tools needed to gain a transparent view of costs vs. business value generated. By leveraging this intelligence, retailers can cut costs in one area to strategically invest in another that drives greater value and ROI. Such tools can also enable fact-based scenario planning and effective decision-making. Through greater transparency, companies can then ensure that innovation and digital strategies take centre-stage in optimising services – as well as adding value.

The pound climbed against the dollar on Friday, reaching $1.40 for the first time in almost three years.

Sterling’s rally came on the back of reports that UK retail sales fell 8.2% in January as post-Christmas lockdown measures cut down on consumer spending.

It also coincided with ONS data released on Friday showing that the UK government borrowed only £8.8 billion in January, far below economists’ expected £25 billion. Earlier pandemic borrowing had contributed significantly to the UKs national debt of £2.1 trillion.

While it reached a high against the dollar, the pound fell 0.15% against the euro, reaching €1.1538 after what had been 11-month highs on Thursday.

The last time the pound was equivalent to $1.40 was in April 2018.

Chris Williamson, chief business economist at JHS Markit, said that the UK’s PMI reading during the latest lockdown measures suggested that the economy is ready for recovery. “Although the data hint at a renewed contraction of the economy in the first quarter, business expectations for the year ahead improved to the highest for almost seven years,” he explained.

The $1.40 milestone was reached amid a surge of vaccine optimism and hopes for reduced lockdown restrictions in the UK, with a “roadmap” for easing restrictions set to be announced next Monday.

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Around 16 million UK residents have now received their first COVID-19 vaccine. The country has advanced further in tis vaccination programme than any other in Europe after being the first to approve the Pfizer vaccine.

Seven mass vaccination centres have been built in England, with the government voicing hopes that all adults may be vaccinated by the autumn.

Online fashion retailer Boohoo has bought out Dorothy Perkins, Burton and Wallis from Sir Philip Green’s failed retail group Arcadia for £25.2 million.

The deal comes only weeks after Boohoo moved to buy Debenhams, a prominent UK high street retailer also owned by Arcadia Group, for £55 million.

Like the Debenhams purchase, Boohoo will acquire the brands and online businesses of Dorothy Perkins, Wallis and Burton, but not the 214 physical stores that come with them. Administrators Deloitte, which has been overseeing the sales, stated that around 2,450 jobs will be lost as these shops wind down their business.

260 head office roles relating to the brands’ design, buying, merchandising and digital operations will be transferred to Boohoo.

John Lyttle, CEO of Boohoo, touted the deal as the newest entry in a “successful track record” of integrating high-profile British brands into Boohoo’s online storefront.

“Acquiring these well known brands in British fashion out of administration ensures their heritage is sustained, while our investment aims to transform them into brands that are fit for the current market environment,” he said.

Asos, an online retail rival to Boohoo, also bought out a number of Arcadia’s largest brands last week. Topshop, Topman and Miss Selfridge were purchased for £330 million in another brands-only deal that did not include stores or warehouses, putting a further 2,500 jobs at risk.

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Commenting on the news of Boohoo’s latest purchases, Sendcloud CEO Rob van den Heuvel cautioned against viewing the move as demonstrating that physical retail no longer has value. “Consumers are craving the face-to-face retail experience now more than ever, with 44% of consumers planning to start shopping at retail stores as soon as businesses reopen,” he noted.

“While shifting to eCommerce may be one of the only ways businesses survive in the short-term - now is not the time to tear down brick and mortar stores.”

With Wall Street hedge funds’ practice of short-selling stocks coming into focus as one of the causes of the GameStop craze, those interested in following the story will want to know the basics of the strategy and how it is used to make money by identifying companies in decline.

At its core, short-selling is a simple (if risky) process which beginner investors may want to steer clear of until they have grown more experienced at identifying market trends.

The Concept

Short-sellers take the “buy low, sell high” mantra of regular trading in reverse. They first identify a stock or other asset that they expect will decrease in value down the line. They then borrow shares of this stock from a brokerage and immediately sell them to another investor willing to pay the market price. These borrowed shares must be returned by the expiration date of the brokerage’s loan.

The trader in this instance is hoping that the price of the shares in question will go down after they have been sold, allowing them to purchase them back at a lower price. The difference between the initial sale and the buyback makes up the short-seller’s profit – or loss.

In a hypothetical scenario, a trader could believe that XYZ Company stock is overvalued at $100 and decide to bank on its price going down. They borrow 100 shares and sell them for $10,000, becoming “short” 100 shares, and wait. A week later, reports of XYZ’s poor performance begin to spread, and its stock deteriorates to $50. At this point the trader buys 100 shares back and returns them to the lender.

Ignoring possible costs associated with the short position (as explored below), the trader in this case would gain $5,000 from buying their shares back at half the price for which they initially sold them.

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There are some technical factors involved with short-selling to consider too. Opening a short position requires a trader to have a margin account; different brokers will have their own set of qualifications an account must meet before they allow margin trading. Traders will also likely pay interest on the value of their borrowed shares while their position remains open, and may of course need to pay a commission fee depending on their choice of brokerage.

The Risk

Short-selling is fundamentally different from standard equity trades. When you buy stock with the expectation of selling it higher, but the price doesn’t go the way you expected, the maximum loss you will make is equal to the value of the stock you purchased.

This is not the case when you bet for the stock’s price to go down. As there is no limit to how high a stock’s value may rise, you stand to make technically infinite losses should you misjudge your position. While large financial organisations may be able to cover such losses through other avenues, smaller investors can and have gone bankrupt by placing short positions on stocks that then ballooned, which is why most traders are advised to avoid them – or at least not to concentrate in them.

Some investors also see an ethical issue with short-selling stocks, as it carries the perception of “betting against the home team”. While shorting itself does not necessarily damage a company, and some economists argue it can provide liquidity and drive down overpriced securities, a more harmful variant of the practice involves traders taking a short position before spreading malicious disinformation about a company to drive its stock down. This “short and distort” tactic has grown in usage as social media has made it easier for investors to communicate and share stock tips.

It is unclear whether the firms that recently shorted GameStop did so maliciously, though Citron Research – one of the hedge funds at the heart of the craze – has now pivoted away from publishing “short reports” altogether following trader backlash to the practice, focusing instead on long position opportunities.

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