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SHORT
SELLING EXPLAINED
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What
is selling short?
Short-selling is borrowing an investment and selling it, knowing that
later you will have to buy it again so you can return it. In other words,
selling short is selling something you don’t really own. You might sell
short when you believe the price of a stock will fall in the short run,
and you want to profit from the drop. Selling short is very risky. Stocks
tend to rise over time, so being a short seller requires good market
timing.
Here’s how short-selling works. Say you want to sell short 100 shares of
a stock that you think is about to drop. Your broker borrows the shares
from someone who owns them, promising you will return them later. You sell
the borrowed shares at the current market price. When the price of the
shares drops (you hope), you "cover your short position" by
buying back the shares at the lower price, and your broker returns them to
the lender. Your profit is the difference between the price at which you
sold the stock and your cost to buy it back, minus commissions and
expenses. If you’re wrong and the stock price skyrockets, your potential
losses are unlimited. You must buy the stock back at the market price to
cover your short sale, no matter what they cost. Sometimes, you will see a
stock price jump dramatically after it has been falling. That may be
because short sellers are scrambling to cover their positions.
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