How To Sell A Stock You Don't Own

Tonight, we want to review shorting. I don't
know why but so many people become uneasy when they
hear this term. I guess that occurs when there
is not a clear understanding.

Shorting is used to capitalize on a drop in a stocks price
rather then a rise in price. Buy a stock...goes up you
make money. Short (sell) a stock...goes down you
make money.

But how do I sell a stock that I do not own you may ask.
You borrow the stock from your broker and sell it to
someone else.

Your broker has it in inventory or they borrow it from
another brokerage firm. They actually loan you the stock
to sell to someone else. This is all done automatically and
instantly when you place an order to short a stock.

Once you have shorted the stock (by borrowing it) you must
eventually return the borrowed item...the stock, back to
your broker.

You do this by placing a buy order on the stock you
are holding short. The stock you buy is then returned.
Again this happens instantly.

Example: You decide that stock ABC at $50 is about
to go down so you want to short the stock. You click
your online account "Short" button to place the order,
let's say 100 shares of ABC at 50.

The price of ABC goes down for you. Let's say that
ABC declines to $45. At 45 you decide that it
may not decline much further, so you click your "BUY"
button at your brokerage account to buy 100 shares
at $45.

You shorted (sold/borrowed) the stock at 50 and bought
it back at 45. You made $5 per share in profit or $500.

You sold the borrowed stock for $5000 ($50 X 100 shares)
and bought it back for $4500 ($45 X 100 shares).

All the mechanics of borrowing the stock, debiting your account
(when you buy), returning the stock, crediting your account
(when you sell) is handled seamlessly by your broker.

Of course you can lose money if the stock goes up when you
place a short order (like a stock going down when you place
a buy order). That's why it is imperative to be properly
prepared when entering the stock market.

The point is, do not limit yourself to making money in
only ONE direction. When the market is crashing you need
to be shorting stocks, not buying or holding on to your buys.
And when the market is taking off, you need to be buying.

Don't limit your income potential by only purchasing stocks.

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