ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel
  • »
  • Personal Finance»
  • Investing in Stocks, Bonds, Real Estate, More

Short Selling Explained

Updated on June 2, 2010

Short Selling Explained

If you want to have short selling explained to you in any kind of meaningful way, don’t look to most stock investment websites to do it; a vast majority of them try to over-complicate it to the point where you blow a few brain cells trying to figure out all the technical jargon and so forth. I wanted to make this hub as a way to explain short selling stocks in the most easy-to-understand manner possible. When I first got started in the stock trading world, I didn’t have any kind of mentor or anyone walking me through the thick jungles of “investment-speak”, so I had to spend a ton of time “hitting the books”, so to speak, reading investment glossaries, and just learning all the terminology until I could get a solid grasp on the concepts. I won’t lie…the principle of shorting stocks was really hard to grasp at the beginning, but after a while, with enough “mental rehearsal” and study, you’ll grasp it and then eventually it will be second nature to you as an investor. Basically, short selling means that you sell a stock that you don’t own (I’ll explain that in a minute as well), collect the money as the proceeds from the sale, and then wait for the stock to drop, and then buy the stock back at a lower price later down the road, and then you keep the difference in the two prices (the one you sold the stock for initially and then the one that you bought it for later) as your profit from the trade. Short selling only works if the stock’s price goes down. If the stock’s price stays neutral & doesn’t go anywhere, you’re stuck with an open position in a stock that’s not doing anything. If the price of the stock goes up, you’re losing money, because you are in effect going “negative long” on the stock. As a matter of fact, most online brokerages use the actual negative sign, or the “minus”, in front of the amount of shares that you’re short. In other words, if you short 100 shares of a stock, your online position statement will read “-100” shares of whatever stock it is. But back to the basic premise of short selling. Most people will ask, “How in the world can I sell shares of a stock I don’t own?” It’s actually pretty simple; when you short a stock (and yes, “short” is actually a verb in the stock trading world), your brokerage lends you the stock that you’ll be shorting, and once you sell those borrowed shares in the open market, your trading account gets credited with the cash proceeds from the sale right off the bat. So if you were to short 100 shares of XYZ stock at $50.00 per share, your account would be credited with $5,000. That $5,000 represents the absolute most money you can make on the stock, because remember, shorting a stock means that you make money ONLY when the stock’s price goes down. So you would not be able to make more than $5,000, because the stock cannot go any lower than zero.

Image courtesy of Microsoft Office Clip Art
Image courtesy of Microsoft Office Clip Art

What Short Selling Means

So anyway, you’ve entered into a short position, the brokerage has loaned you 100 shares of XYZ stock, you sole them short in the market at $50.00 per share, your account was immediately credited with $5,000 from the sale, and now you’re just waiting to see what the market will do. If your bet was right and the price of the stock drops to $25.00 per share, your position is now profitable, because those same 100 shares that you sold for $5,000 are now only worth $2,500. What this means for you is that you could simply close out your position by taking the $5,000 that’s in your account and buying back those same 100 shares for $2,500, and you can keep the $2,500 difference as your profit. Think about it: the money in your account is based on the value of those shares at all times. It’s still 100 shares of stock, no matter what the current price of the stock may be at the time. When you shorted the stock, you didn’t really receive the $5,000 as much as you received the current cash value of 100 shares of XYZ stock (which was $50.00 at the time of the sale). Again, if XYZ’s stock price drops to $25.00 per share, the current cash value of the stock is now only $2,500, but you have five grand in your account to buy the stock back with. It’s a nice position to be in, no doubt. When you finally do buy the stock back and close out the position, you have done what’s known as “covering your short”. You walk away from the trade having pocketed $2,500 from selling a stock that you never technically “owned”. How cool is that??? Again, the terminology can throw you at the beginning, but you just have to keep studying and going over the jargon until it becomes second nature. Hopefully I have done a decent job at attempting to explain short selling in some kind of understandable manner…either way, drop me a comment if anything has tickled your fancy.

Comments

    0 of 8192 characters used
    Post Comment

    • profile image

      Dudhiya 3 years ago

      Thank you Sara for letting me know. I'm not sure how to subisrcbe to your feed on Squidoo, or if there is a way, so if you let me know of newly published patterns I'll be happy to add them for you. As for your blog, I have subisrcbed and try to link to any new patterns.It's already day 5 and I only have day one done, but I'm hoping to get my butt in gear soon. I've been under the weather for the last day and a half and it sure doesn't help when you sleep 24/7. There are many toxins coming out of me right now, so many that my skin is very rough over my whole body. I'm hoping when this cleanse is over that I'll feel good and be able to get on with my life.I so look forward to completing the challenge thank you so much for the encouragement!

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: "https://hubpages.com/privacy-policy#gdpr"

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)