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Short -- To sell stock you do not (yet?) own, in the anticipation that it will go down.
Conversely, usually folks think of a "Long" position in stocks or any investment. Going Long is to buy stock -- that you do not own until you buy. You then hope you will make money from either the dividends, and/or increased share price.
When you Short anything -- Stocks or commodities -- you are thinking the price will go down. So you offer to sell it at today's price by a contract or option. When the real price goes down tomorrow, you then get to deliver it at today's higher price, but only have the cost of tomorrow's lower price. Your profit is the difference in price.
It has legit uses if you are a producer of any product. It allows you to have a set, known price before you produce the product. That is where the method developed in the commodity markets. A farmer could know what his produce would be worth, in advance.
As it has shifted to stocks, the world has gotten hinky. It is more the realm of speculators rather than investors or straight-up business folks.
Since tomorrow's stock prices can be selectively manipulated, bad folks doing bad things can profit from those bad things. For example, execs or accountants may know that a stock will suffer bad news and try to profit from it by Shorting. On a larger scale, some airline stocks where shorted before 9-11.
Christmas is coming soon and you know you will have to buy your kids presents. You also know that toys will be much cheaper after Christmas, so you promise your kids you will buy them presents in January. Now you have an obligation to deliver the presents at a future time. You will save/make money when you buy the presents in January.
How does is this work with stocks? Let say XYZ stock is selling for $100 a share. You think it will go down in value in the future. You call your broker and tell them you want to short 100 shares of XYZ. Your broker will let you borrow 100 shares of XYZ and sells the shares for $10,000. You have just sold shares you never owned. One week later XYZ stock falls to $50, and you call your broker and tell them you want to cover your shorts. Your broker buys 100 shares of XYZ at the lower price of $50 for $5,000. The shares are then returned to your broker. You now have a profit of $5,000. On the other hand, you would lose if the stock goes up in value. The loss can be huge, since the value of XYZ can rise indefinitely, theoretically.
I must also point out that the stock market is a game of speculation. Thinking otherwise will only lead to disappointments. "Investment" is a word thrown around by Wall Street to give it respectability. When you sell your stocks and make some money, your gain comes from somebody else who pays for those stocks. If the person who buys your stocks can't find somebody else to pay more for them later, he or she will lose money. It's a zero sum game.
Also keep in mind that shorting requires a 'margin' account where you are borrowing funds against your holdings in order to execute the trade (you don't get to gamble with the brokers money).
I guess I'll just add to cdlena's comment that you really shouldn't be using a margin account if you're still learning basic terms. In fact, never use a margin account. You'll find it incredibly easy to lose more money than you actually have.
'Never' is very strong advice... lets say only use a margin when it is to your advantage and not a large risk. A couple of examples where I have used margin...
Just recently I needed to sell a security in order to make a down payment on my current house. I needed to wire the money for the house two days before the ex-dividend date and I didn't want miss the dividend... so I sent the wire using margin and the interest charge was much less than the dividend.
Some years ago I had good sized portfolio with a brokerage that had a very low margin rate (about 2% but all of them were lower up until about 2003) so I consolidated all of my debt (house, car, etc.) using my margin account. I deposited my paycheck into the account and everything I did not spend wound up reducing my debt... paid off the house and everything else ten times faster and saved a lot of money.
I have used margin to short a stock once or twice but don't make those kinds of trades anymore.
'Never' is very strong advice... lets say only use a margin when it is to your advantage and not a large risk. A couple of examples where I have used margin...
Just recently I needed to sell a security in order to make a down payment on my current house. I needed to wire the money for the house two days before the ex-dividend date and I didn't want miss the dividend... so I sent the wire using margin and the interest charge was much less than the dividend.
Some years ago I had good sized portfolio with a brokerage that had a very low margin rate (about 2% but all of them were lower up until about 2003) so I consolidated all of my debt (house, car, etc.) using my margin account. I deposited my paycheck into the account and everything I did not spend wound up reducing my debt... paid off the house and everything else ten times faster and saved a lot of money.
I have used margin to short a stock once or twice but don't make those kinds of trades anymore.
I understand, and see that you obviously have a much greater knowledge of the market than Roma. I apoligize if I came across as generally speaking, but I was trying to direct the comment to Roma.
You know the Boston Red sox are way over hyped. People are buying their gear left and right and overpaying for it. You ask your buddy to borrow his Boston Red Sox hat from him.....you tell him you'll give him hat back eventually. You sell his hat immediatly at a high price. You wait til the team loses in the playoffs. You buy back the hat at a very low price when the hype is gone and no one cares about the red sox anymore.
So what you have done is buy low, sell high. (except you first sold high, then you bought low)
Also, you may ask why your buddy would lend you his hat. We'll just say you gave him a few dollars for that
I can't believe this thread is still here. I need to clear up a few things here. You are required to open a margin account to short stocks, but you don't have to trade on margin. In other words, you don't have to borrow money from your broker to buy the stocks. A margin account is actually a federal requirement desired to protect the broker from losses by allowing the broker to liquidate your account. As far as risk goes, a short position is not any riskier than a long position. A simple stop loss will protect the investor in any position, long or short.
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