| About short selling | | | | pocket the difference. |
| Short selling means selling a security, contract or | | | | The only difference between real-market short sales |
| commodity not owned by the seller. The seller is | | | | and the camera example is that, in order to borrow |
| committed to eventually purchase the financial | | | | shares, you must maintain the proper "collateral" |
| instrument previously sold. Short sales are used to | | | | (capital) in your account. Then, part of your money, |
| capitalize on an expected decline in the security's | | | | and the money you get from the short sale, will be |
| price. | | | | "frozen" by your broker until you buy back and |
| Still confused about shorting stocks? | | | | replace those shares. |
| Short selling has several uses, but its primary use is | | | | Why selling short? |
| to allow investors to make a profit if a particular | | | | There are many reasons why short selling constitutes |
| stock falls in price. | | | | a good trading practice. |
| A very simple explanation: | | | | By selling short, market participants may help others |
| - Assume you know or have a reason to believe a | | | | to identify overpriced stocks which are under the |
| camera, exactly the same as the one your friend | | | | false impression of financial health. That represents an |
| just acquired, will be replaced by a newer model and | | | | effective alert to avoid holding or increasing their |
| will sell at lower prices anytime soon. | | | | positions in failing companies. |
| - You could borrow the camera from your friend and | | | | By selling short, traders can make money even during |
| sell it immediately to a third person at the current | | | | negative market environments. In the stocks |
| retail price, say, $500. | | | | universe, low-performance stocks are ubiquitous, |
| - Next month when the camera's price falls, you | | | | while high-performance stocks are scarce. "Bubbles", |
| could buy it for $300 and "return" the newly | | | | outrageously overvalued stocks, are present on |
| purchased camera to your friend, replacing the one | | | | almost any "hot" sector. Traders can make huge |
| you borrowed from him. | | | | profits during both the bubble inflation and the final |
| - Since you sold your friend's camera for $500 and | | | | burst. |
| purchased the same model a few weeks later for | | | | Because of their implied risks, short selling strategies |
| $300, you were able to profit by $200 on the | | | | are a bit more difficult to master than simple |
| transaction. | | | | buy-and-hold trading/investing strategies; that's why a |
| In the stock market short selling operates the same | | | | vast majority of books about online trading advocate |
| way. Your broker will lend you shares you can sell at | | | | that one you must learn as much as you can about |
| a high price. Once the price falls, you can buy back | | | | short selling before actually committing real money |
| those shares, replace them to your broker and | | | | into it. |