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What is "Shorting a Stock"?

Updated on June 10, 2013

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

Cover

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.

http://www.youtube.com/watch?feature=player_embedded&v=h2FEwaUztf0

HAL Short trade

Do you understand "Shorting" a stock?

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    • TycoonSam profile imageAUTHOR

      TycoonSam 

      5 years ago from Washington, MI

      My pleasure Martie!

    • MartieCoetser profile image

      Martie Coetser 

      5 years ago from South Africa

      Oh, sorry tycoon, I did not 'get' it during the first read, so I had to read your hub again. And now finally got it. When it comes to stocks and the stock market, I tend to strike a blank, yet numbers are my forte. Thanks for explaining twice :)

    • TycoonSam profile imageAUTHOR

      TycoonSam 

      5 years ago from Washington, MI

      Thank you Audrey. Yes, I plan on writing more Hubs about trading stocks. Just as soon as I can.

    • AudreyHowitt profile image

      Audrey Howitt 

      5 years ago from California

      Can you tell us more about stocks? I thought this was a great explanation for a difficult concept--Thank you!!!

    • TycoonSam profile imageAUTHOR

      TycoonSam 

      5 years ago from Washington, MI

      Martie,

      The reason one would short a stock is to make a profit. Sell HIGH Buy Low. The difference between the sell price and the buy price is your profit.

      Thanks for stopping by. If you have any more questions I would be happy to answer them.

    • MartieCoetser profile image

      Martie Coetser 

      5 years ago from South Africa

      Interesting! But WHY would one shorten a stock? What is the possibility of adding the logic behind 'shorting a stock' to this interesting hub of yours?

    • TycoonSam profile imageAUTHOR

      TycoonSam 

      5 years ago from Washington, MI

      Thank you for the up vote Torri Lynn, and good luck with your Journalism studies!

    • torrilynn profile image

      torrilynn 

      5 years ago

      hi tycoonsam,

      i never knew what shorting a stock meant

      i do remember taking a class where our teacher had us buying and selling stocks and he wanted us to try to make as much money as we could and that we had to calculate what we earned and what we loss. thanks for this article. voted up.

    • TycoonSam profile imageAUTHOR

      TycoonSam 

      5 years ago from Washington, MI

      Tammy...for you I will write more of these. Thanks for stopping by.

    • tammyswallow profile image

      Tammy 

      5 years ago from North Carolina

      I hope you write more of these. This is something I would love to learn more about. If it were all this easy to understand, I could be an expert!

    • TycoonSam profile imageAUTHOR

      TycoonSam 

      5 years ago from Washington, MI

      Thanks for the nice review Rf!

    • rfmoran profile image

      Russ Moran - The Write Stuff 

      5 years ago from Long Island, New York

      Why oh why didn't I short my bank stocks in 2008? But then, everybody asks that. Excellent hub, useful and educational.

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