What is Short Selling (Shorting)?

October 05, 2015 Brian Wieners


Let's say you believe price will head down for an asset. Do you stay away and just watch, waiting for it to rise? Maybe, maybe not. Smart investors and traders know how to take advantage of these situations by selling the asset A.K.A (shorting it). Heres an example of shorting an asset. Let's say we sell  (AAPL'S) at $100 and believe price will go to $95 soon. We now wait for price to hopefully decrease to $95 before buying it back and pocketing the $5. Confused?? Good you should be, Lets clear this up. 

When you short an asset you are selling it to a buyer. To sell it you need to “borrow” it from the broker of your choice. Now that you’ve borrowed it; You can sell it and then potentially buy it back at a lower price to return it back to the broker pocketing the difference. 

This can be illustrated in the real world with a free trial of a T.V at "rent a centerd". Lets say you borrowed a flat screen "T.V" from "Rent a Centerd" that you plan to return in a week and they are going to charge you $5 for the week as a 5$ trial.... (Commision) You then sell the "T.V" at a price of $1000 to someone. You now have $1000 and No "T.V". 6 days later the "T.V" has dropped in value. You now need to return a version of the one you originally borrowed back to "Rent a Centerd". You buy the "T.V" back with the $1000 you received from the sale but only need to pay $900 to buy it back since it's value decreased. You have $100 leftover to keep. You now return the "T.V" back to "Rent a Centerd" with $100 in profit (Cover). Now simply Replace  the word "T.V" with "Asset" and "Rent A Centerd" with "Broker" and you now understand the concept of shorting in the financial markets.

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