What is "Shorting a Stock"?
Sell High Buy Low
Shorting a Stock
For me, one of the most difficult concepts to understand was "Shorting" a stock. This type of trading entails Selling a stock before you own it. Think of it this way. Buy low sell high....but in reverse. When shorting a stock you are first Selling it High and buying it back at a lower price. To do this you are actually borrowing the stock from your broker then returning it to him. You "Short" it with the intention of it going lower in price. You make the difference between the sell price and the buy price. For example You sell 100 shares of XYZ at $10.00 per share then when it goes down you buy it back at the lower price, let's say $9.00. The difference is $1.00 X100 shares = $100 minus fees and commission. On the same token if you short 100 shares of XYZ at $10.00 and it goes up to $11.00 and you buy it back then you lose $1.00 X 100 share at a loss of $100 plus fees and commission.
Borrowing the Stock from your Broker
When Short selling a stock you must first borrow it from your broker then return it to him when closing the trade. This sounds more complicated that it is. With today's technology it's all done from the comfort of your own home with the push of a button on your computer.
I'm a Day Trader and Shorting a stock is as easy as "Going Long". Going Long means you buy the stock with the intention of it going up then sell it at a higher price.
Going Short means you first Sell the stock with the intention of it going down then you buy it back at the lower price, closing out your position.
Think of it like this:
You Sell 100 shares of a stock making you -100 shares.
Then you buy back 100 shares making you flat or 0.
ESRX Short Trade
To "Cover" your trade means to close it out. If you are Long 100 shares of a stock then you would Sell 100 shares to "Cover" your trade, closing out your position.
If you are Short 100 shares of a stock you would "Cover" your trade meaning Buy 100 shares to close out the position.
Example of a Short trade
Here is a video of a Short trade I took back in June of 2012. This is one that worked out nicely. They don't all work out this smooth and I must say that I do NOT recommend you trying this with out proper training, and NEVER risk money you can not afford to lose.
For a full screen video go directly to YouTube.