What is Net Short?
In finance, net short refers to holding more short positions than long positions in a given security, sector or portfolio. Net short is the opposite of net long.
How Does Net Short Work?
For example, let's assume an investor owns 4,000 shares of Company A, 2,000 shares of Company B and 1,000 shares of Company C. Her portfolio is net long 7,000 shares at this point.
The following day, she shorts 3,000 shares of Company X, 3,000 shares of Company Y and 3,000 shares of Company Z for a total of 9,000 shares. At this point, her portfolio is now net short by 2,000 shares (7,000 long - 9,000 short).
Why Does Net Short Matter?
Going net short in a security, sector or portfolio means that the position will now make more money when prices decline and will generally lose money when prices increase. Typically, experienced investors go net short when they feel that earnings estimates are too optimistic or a particular security/sector is overvalued.