Mike,

Shorting a stock means you sell it when you don't own it, then buy it back later to 'cover' the position (replace the stock). When you do the initial sale, the money is placed into your account. When you buy it back later, you pay whatever the market price is for the stock at that point.

Short sellers are expecting a stock to move downward. They expect the sale to be at a higher price than the purchase. Since you are paid upfront for the sale, you use those funds to complete the purchase. If the price is lower, you get to keep the difference, and that's the profit. If the price is higher, you pay all that you initially received and more, and that become a loss. You pay your normal commissions on both transactions as well, which factor into your profit.

On the initial sell, you are borrowing the stock to sell from someone else. The brokerage takes care of this behind the scenes. It's not always possible to do this, as it's not always possible for the brokerage to perform the 'borrow'. I don't know the details about how this works behind the scenes...

I've also read that you might have to pay a 'fee' for the borrow, but in practice I have not run into that myself (I generally don't short though, instead using options for any position in that direction).

That answer your question? (definitely not a 101 topic. ;) )

It's worth noting that with a short, you technically have unlimited downside risk, since there's no limit to how high a stock price can go. Conversely, when you buy a stock, your downside is limited to 100% or a price that drops to $0. Clearly not for the faint of heart.

Good response to your question Mike from Bryan.


I NEVER go short - even though I'm absolutely convinced that either the actual stock - or that "industry" is going down. I simply can't get that deeply involved in their financials - or follow something that closely. That takes WORK - and is best left to very savvy investors. The minute you short something -- some company in their industry will announce a take over at a premium price -- and you get KILLED. This is what I mean by - I can't follow something that closely.

I have, however, sold "short against the box" --- meaning --- The shares I intend to "short" are already held in my account.

So -- I might have 1000 shares of something -- I feel -- or have read news -- that I don't like that might cause the shares to go down (I THINK) -- so maybe I sell 500 shares (or even the full 1000) "short". Collect the cash.... NOW - I at least know my cost for the replacement shares when I "cover" the short.

All in all -- this is not a strategy to play unless you're a real gambler. I don't understand why anyone (except a pro) is going to want to bet against a company doing well.... by shorting them hoping they'd do poorly. I prefer just to buy shares in a company I think is going to do well long term and pays me a dividend.

We usually look for police cruisers and pick up trucks. Last year we were driving through Carlsbad, NM and it was a little early, like 5:20pm. Places were mostly empty. Wife insisted on Chili's. Not that big a fan of Chili's, but you know what you are going to get at least. I swear someone must have unloaded a bus because it was totally packed and full of people who were obviously from elsewhere. Every time I go into a Chili's that was that busy the service has been painfully slow, especially in small cities for some reason. I have 3 young children who are hungry, not doing that to myself. So I turned around, loaded the kids and drove down the street. Gambled on a local joint that had one pick up truck in front. "Danny's Place, Real Pit BBQ". It was awesome. By the time our food arrived the place was full and people were waiting to be seated. Sometimes gut feel and lucky works out.

Totally correct!!! Can you imagine having a short "on" say NetFLix (NFLX) and watching it run after they announced a 7 for 1 split!!

Or shorting Amazon because you're sure Xmas is going to suck....


Shorts usually work best in "hindsight".... after you've watched the stock you knew was going to implode actually does what you thought. Handy - and fun even - as long as you're not actually placing that bet. Reminds me of the 'Bama game --- I was $100 on 'Bama by 7..... yeah had it beat with a winner coming down the last 2 minutes - and BAM! Clemson scores and kills my spread! So while I won the game - I lost the bet!! ($100 plus the 10% vig). So you could be right - and still lose! Yeah the company you shorted sucked - but then somebody else steps in and buys the company because they think they can turn it around.... or the big contract they lost - suddenly gets awarded - or the product (usually drugs) doesn't work for what it was designed for - but works great for something else.... the possibilities are as endless as your losses can be! LOL

Don't forget about the story of the guy who shorted a stock late in the day. Overnight the stock went gangbusters and he owed well over $100k when the markets opened the next day. He didn't have the $100k.

Shorting stock, or gambling in Vegas. I'll pick Vegas...

Thanx Bryan, it makes more sense. I dont have a total grasp on it logistically speaking. I guess it would be like if your a broker for a house, agreed for a price and you sell it for less, make the difference between the two?

You are selling stocks you don't technically own ( stocks on loan) and hoping you can buy them cheaper at a future date to pay back the "loan".

To use your analogy.... it would be like selling a house you borrowed from your neighbor, for $500,000 and hoping the buyer defaults and you could buy the house back for $400,000 and return it to the neighbor you borrowed it from.

If, in the meantime, the real estate market gets 'hot' - and the house value shoots up to $650,000 and the neighbor is demanding the return of his house - and you have no other option but to go to the buyer and lay $100 bills on the table until the buyer decides to sell back to you.

Sometimes - when a "short" is "obvious" to many... that trade gets "crowded" (using terms in quotes that you'll hear on TV etc) and everyone decides to cover... the stock can shoot up just because everyone has to buy the shares to cover their short positions.

Basically - it's a very risky trade.