Explain short selling

Thomas. PLease.

Thomas. PLease.

Thomas. PLease.

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Hi there, just watching a program, million dollar traders. Seems like a good program, but I don't understand what they mean by short selling making money by borrowing, then selling when the stock goes down? Wouldsomebody be able to explain what is meant by this?

Thanks tom.
 
In finance, short selling or "shorting" is the practice of selling a financial instrument that the seller does not own at the time of the sale. Short selling is done with intent of later purchasing the financial instrument at a lower price. Short-sellers attempt to profit from an expected decline in the price of a financial instrument. Short selling or "going short" is contrasted with the more conventional practice of "going long", which typically occurs when a financial instrument is purchased with the expectation that its price will rise. Thus, being "long" is just way of saying that you own a positive number of the securities; being "short" is just a way of saying that you own a negative number of the securities.

Typically, the short-seller will "borrow" or "rent" the securities to be sold, and later repurchase identical securities for return to the lender. If the security price falls, the short-seller profits from having sold the borrowed securities for more than he later pays for them. However, if the security price rises, the short seller loses by having sold them for less than the price at which he later has to buy them. The practice is risky in that prices may rise without bound, even beyond the net worth of the short seller. The act of repurchasing a shorted security is known as "closing" a position.
 
You make money when a stock goes down. That's all you need to know.

Even if you're a trader, that's still all you need to know, because you just ask a broker to "short" a stock, you don't need to get into the ins and outs.
 
If I sold somebody a car I did not own for £1000, then I went out and found one for £750 , that would be a short sell , right?
 
At a very high level:

Normal sharedealing: Buy a stock and sell it when the price moves up.
Short selling: Sell a stock that you don't own, then buy it back when the price is lower.

Obviously you can make a loss on either method if the prices moves the wrong way.
 
You borrow the shares and hope they go down, then you buy them back at the lower price and make a profit of the difference :)

Think of it as a reversal of buying shares for them to go up in price. The borrowing part sounds like it's confusing you :)
 
Right, basically..

With trading, you have the option to sell or buy at any point. Do not think of owning the shares already. It is an odd concept that you can sell what you dont effectively have and it is borrowing, but I think the word borrowing confuses things because you borrow with the expectation to return (and while you do return, I dont want to confuse matters). So...

Analogy:

You have a shopping basket with nothing in. You then sell Tesco £5 of apples. The price of apples then falls. You then buy back £5 of apples, but because the price has fallen.. you are now buying back more apples, ergo have made a profit from a falling price.

Hope this is easier to understand.
 
Yeah it is the borrowing part that confuses me, I think I understand what it means now.

so for example if i sold a car i didnt own, it loses value, i buy it back at a lower price, my debt is then settled and i keep the difference.

aha, i understand it now, thanks guys.
 
whatleytom said:
But i'd like to what it is now.
Click to expand...

Say the share price of company X was £01.00, and you predicted that it'd drop in price, you'd short sell. You would borrow the amount of shares you want, sell them at the current price, and then when the share price declines (like you predicted), you then buy the same amount of shares back (at the lower price) and pay the person you borrowed them off. You'd then keep the profits.

Example:

1. Borrow at £1, then sell them
2. Wait for share price to drop
3. Buy them back (at the lower price)
4. Pay what you owe (the shares), with you keeping the profits.
 
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gord said:
Analogy:

You have a shopping basket with nothing in. You then sell Tesco £5 of apples. The price of apples then falls. You then buy back £5 of apples, but because the price has fallen.. you are now buying back more apples, ergo have made a profit from a falling price.

Hope this is easier to understand.
Click to expand...

I thought it'd be more a case of: I sell you an apple which I dont currently own at the current trade price of say 50p and will give it to you next week.

In this week the cost of the apple declines to 40p. I buy the apple at the new price and gain 10p in the mean time.
 
In principal it sounds iffy to me, even with the grossly simple explanation as I understand it - let me see; with the expectation that say, a bag of chips is going to cost less in a weeks time than it does now, I 'borrow' a bag of chips from my mate Fred (with the promise I'll give it him back in a week) in order to sell it to my other mate, John.
John wants to buy, so I sell him the bag of chips for 2 quid. With my clever business acumen, I predicted that a bag of chips will only cost a quid fifty by the end of the week, so I go to the store and buy a bag of chips for a quid fifty and give it back to Fred, having made fifty pence from the arrangement. I sold something I didn't own with a mind to making a profit from returning something at less cost than I sold it for, assuming my prediction about falling value proves to be correct.

And this is good business practise? Highly dubious.

I don't think my friendship with Fred would last if he found out what I was doing with his bag of chips. :p
 
"Highly dubious"? "Iffy"? If short-selling is highly dubious, then so is buying shares low and selling them high.

So, you buy your chips off of your friend for £1, because to the best of your knowledge the price of chips is going to rise to £50 next week (due to a potato famine, or a chip shortage, or because the Weight Watchers' society have their 'free week' that week).

You then sell the chips that week for £50 and make a £49 profit.

This is the reverse of short-selling. Shorting allows people to leverage their knowledge for when share prices go down. Buying low selling high is the opposite.
 
jumpy said:
And this is good business practise? Highly dubious.
Click to expand...

and what about naked short selling! you don't even have to 'borrow' the shares to sell them and it fact you can sell more shares than are in existence - its illegal but it happens all the time - a lot of businesses have been destroyed using this tactic but the authorities have been reluctant to launch investigations due to the complicated nature of the financial system.
 
jumpy said:
I sold something I didn't own with a mind to making a profit from returning something at less cost than I sold it for, assuming my prediction about falling value proves to be correct.
Click to expand...
Yes, but whoever lent the shares/chips to you in order to short like this is hoping for the opposite, so that you would be forced to hand back shares you had to buy for a much higher price.
 
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