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So what is short selling if you actually profit from the stock price going down?<\/p>\n
Short selling (or shorting), is when you ‘borrow’ stock, sell it, then at some time in the future buy back the stock and return it to the ‘lender’. If the buy price is lower than the sell price was when you borrowed it, it will cost you less money to buy it back. This means you will have change left over from the whole transaction.<\/p>\n
This ‘change’ you have left over is your profit from the short sell<\/strong>.<\/p>\n To put an unlikely analogy to it to make it easier to understand: You borrow your friend’s watch and sell it to a shop for $1000. A week later you hear the shop is having a 50% discount sale, so you go back in there and buy the watch back for $500. You return the watch to your friend and pocket the difference. You have effectively (and unwittingly) just shorted your friend’s watch and made $500 from the short.<\/p>\n I am a trader and as such play the stock market to make money, period. I don’t grow emotionally attached the companies I invest in. I get in, I get out, I make money. It’s just a mind set I like to be in to detach myself emotionally from what I am doing. We go into more detail about the importance of this in trading in the ‘Trading vs Investing<\/a>‘ article on this site.<\/p>\n I have the same mentality with shorting. I use it to make money only and don’t think that what I am doing is morally wrong. I feel I have to say this because many people do think shorting stocks<\/b> is morally wrong. After all you are hoping that the stock price will fall, perhaps almost willing it to fall.<\/p>\n If I have my hard earned nest egg riding on the successes of any particular company I would not want anyone willing the price to go down. This general attitude towards short selling has even lead governments of some countries to forbid it on their markets.<\/p>\n Basically you borrow from the ‘pool’ of margin liquidity in the stock market which is accessed on your behalf by your broker or online trading platform. No one person will ‘loan’ you the stock, in reality you are only borrowing it on paper. The process is instant and done electronically.<\/p>\n Of course you need to have the money in your account to short stock, this effectively guarantees the loan. If you shorted $1000 worth of stock you need to lock in $1000 from your account to make the order.<\/p>\n Certainly that’s what the general consensus wants you to think. In reality, no, it is no different from normal (going long) trading. In fact in some ways it is much better than normal trading. We will discuss this later.<\/p>\n The reason the general consensus thinks that shorting a stock is high risk is because the price of a stock can go up forever. If it did then you would be left owing millions.<\/p>\n Whilst this is not entirely true (your broker would liquidate your trade as soon as it hit zero value), it’s true enough to reiterate the importance that when shorting stocks you must use stops<\/b>.<\/p>\n Using stops (stops for loss and gain) is probably the most important rule in trading, and this is even more so when shorting.<\/p>\nIs It Wrong To Short Stock?<\/h4>\n
Who Do You Borrow Short Stock From?<\/h4>\n
Is Shorting Stock High Risk?<\/h4>\n