Can anyone explain short selling?
I’ve never fully understood how it works.
In a nutshell, within a time frame, you put an auto-bid on stocks that you believe are due for a correction. If you are right, you will make money between their low point and recovery point.
However, the risk is that the stock doesn’t correct, at least within the time frame you set your bid at, and you could take a wash because you are forced to buy a stock at a higher point than you wanted to pay.
The act of trading stocks or commodities in a way to make money if the stock or commodity goes down in value...
Basically, you borrow a stock (like from a broker), and you sell it. You agree, at a fixed point in a future to buy it back and return it to the person you borrowed it from. You are betting that the stock will be lower than the price that you sell it for today, and you get to keep the profit. You borrow 100 shares of XYZ company and sell them today for $50. You now have $5000. if the stock falls to $20, you buy the stock back for $2000 and pocket the $3000 profit. BUT, if the stock rises, you can lose money. Because there is no limit on how high a stock can go up, there is really no limit on how much you can lose. It is a risky proposition and I wouldn’t recommend it. In extreme situations, where there are limited stocks available to be purchased, the price can skyrocket as the investors with short positions try to cover their shorts. This is known as a short squeeze. Not for the faint of heart.
You borrow an asset from someone else, say 100 shares of Tesla. You sell what you just borrowed, say for $250 a share, and get a $25,000 cash loan. You're broker arranges all this, and you pay interest on the loan to your broker until you buy the stock back to return it.
If Tesla has a bad news day, and it's stock goes down to $200, you buy it back for $20,000 and return it to the former owner. Again, your broker arranges it all. From the $5000 difference, you pay your broker his interest and pocket the rest, it's yours to keep.
But, if Tesla has a great news day, and its stock goes up to $300, you now are liable for $30,000 to re-aquire the asset you borrowed and sold (100 shares of Tesla stock). If your broker only grants you a $31,000 line of credit, he closes your loan: He uses your account to buy the now high price stock and also collects the interest owed to him.
You're out $30,000 to buy back the stock and another $1,000 or so in interest for the privilege to gamble in your broker's casino, a net loss of $6,000.
You borrow stock, sell it, hoping to buy it back later at a cheaper price and returning it to the lender.
The brokerages handle the borrowing/returning part.
Short sellers are mercilessly vilified by economic illiterates. They serve a function of investigating/uncovering fraud.