Quote:
Originally Posted by carbuff
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.  ) |
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?