simple question
- Thread starter will_jay
- Start date
Yeah, a lot of people who don't trade much get confused with the concept of short selling.
In your example, you would have sold stock you didn't own, but you would have to buy it back eventually. In your example, for a loss.
When you sell a stock short, you want to buy it back at a lower price.
This thread remembers me of memories years, and years and yeras back when I was trying to understand how a short worked. But even when I understood it, I noticed that it was difficult to explain to people who didn't know anything about stock trading (or even some that did some casual trading..ehhh... investing.. you know.. buy-and-hold).
So I always use the following example: Imagine you are looking for a used car. And you tell me that you are prepared to spend 10k on a model XYZ. I, being well introduced into the car market , know that I can (probably) find that car for 8k somewhere. So I tell you: "ok, I sell you that car for 10k, and I deliver it in 2 weeks". So I sold you something I don't have yet. Then I go hunting for that model and when I find it , for 8k, I buy it and deliver it to you 2 weeks later. Profit for me : 2k.
What's the difference with stock trading? Almost nothing. The only difference is, that in my car example , if I couldn't find it, I could say "Well, you know I had some trouble finding it blablabla", and could try to cancel the sale to you. With stock trading you HAVE to deliver the buyer. So if I promised the car, and I have made a mistake in my judgement and I can only find that particular model for 15k, I HAVE to deliver it to you for the agreed price (10k). Loss: 5k for me.
Maybe the explanation is a little bit lengthy but I hope you understand better now how a short works and what it is.
TFD
So I always use the following example: Imagine you are looking for a used car. And you tell me that you are prepared to spend 10k on a model XYZ. I, being well introduced into the car market , know that I can (probably) find that car for 8k somewhere. So I tell you: "ok, I sell you that car for 10k, and I deliver it in 2 weeks". So I sold you something I don't have yet. Then I go hunting for that model and when I find it , for 8k, I buy it and deliver it to you 2 weeks later. Profit for me : 2k.
What's the difference with stock trading? Almost nothing. The only difference is, that in my car example , if I couldn't find it, I could say "Well, you know I had some trouble finding it blablabla", and could try to cancel the sale to you. With stock trading you HAVE to deliver the buyer. So if I promised the car, and I have made a mistake in my judgement and I can only find that particular model for 15k, I HAVE to deliver it to you for the agreed price (10k). Loss: 5k for me.
Maybe the explanation is a little bit lengthy but I hope you understand better now how a short works and what it is.
TFD
danke: The concept of shorting freezes many peoples' minds for some reason.
I am your broker. You come to me to make a trade. The instrument you want to trade just shot up 100 points and you feel certain the move is groundless and it will fall back quickly.
You borrow the shares/units from me by selling them into the market (since you never owned them you must borrow them from me first then you can sell them).
Sure enough as soon as you open the sell trade the price tumbles 90 points down. All that is your profit.
You then "cover" that is, buy back the shares/units you sold then return them to me (since you borrowed them from me).
You keep the profit less either my commission or spread.
In stocks you can only short on an uptick. Not so in forex.
Also, in stocks new rules make it to where you need a minimum amount of money in your account ($25K?) to actively short stocks. Again, not so with fx.
Cheers!
Sam