What is Short Selling?

Short Selling is the opposite of buying long. When you buy long, or what has turned into just buying shares, you buy for the long term, usually above the actual value of the stock in the thought that the value of the company will increase over time and increase the value of your long term position in the stock.

Short selling is the bet you can make that the price of the stock will go down. Usually this transaction is made when buying long gets out of hand based on speculation rather than investing and the price of the stock is way over the actual value of the company on a per share basis.

Selling short comes in three steps but is done now a days with one step through online brokerage firms, so you can do it with the click of a button. The three steps to selling short are:

1. First what you do is you borrow shares from someone who already owns the security. So you essentially loan the shares from someone who already owns the shares.

2. You then sell the shares to someone immediately for some market price. Usually whatever the current market price is. This sets the price you need to eventually buy the shares back below so you can actually profit from the whole process.

3. Finally when you want to get out of the short sell you need to buy the shares back at some other market price and then fill out the loan you took in step one. If the price is lower than what you sold the shares in step 2 then you make money. If you buy the shares back at a higher price you lost money. You essentially took the loan on the shares for a price and then payed your loan back with those same shares for less.

It should be simple to follow but if not feel free to contact me or leave a comment and I’ll try and explain another way.

Just remember your trying to have the stock go down, you want it to loose. When it looses in a short sell, you win. People who saw the internet bubble of 1999 ready to burst due to stocks that had no chance of making money in the future sold short and more than likely made a small mint. Stocks went from $600 down to pennies in a matter of weeks. That’s a quick million.

But be warned, selling short is risky business. You’re taking a loan out on stock that you don’t have and you can loose a lot of money if the price of the stock goes up.