What is Selling Short?
Posted by hardwarehank, Fri Oct 20 00:19:22 UTC 2006
So, lately I have been studying the art of selling short in the stock market. It’s amazingly difficult to grasp the concept of what I am doing by the definition given by most people, so I will explain it in a way almost everyone can understand.
Your brokerage has lots of customers who are investing in almost every stock on the market today collectively. When you elect to sell a stock short, your brokerage sells it for you (effectively selling someone elses shares of it) and keeps a record of the price. If the stock goes up, you lose money because they have to buy it back at a higher cost, and you must pay the difference. They can even force you to buy it back if it goes up by a fairly large percentage. If it goes dows, like we’re wanting, you buy to cover, which is basically telling the brokerage to buy back the shares you sold short. Since they are buying them back at a lower price, they give you the difference minus a percentage of interest for the time it took the stock to fall. The interest rates are such that you cannot hold onto the loan for more than a couple years generally (about 10%/year right now).
Time to go!
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