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I've been posting my daily strategy on Short Selling in another thread. I've had people here at work ask what a Short Sale is, so I assume some of you are wondering too. Here's my explaination...
In stocks, you can go "Long" (when you think a stock's price will go up), or "Short" (when you think it will go down).
Going long is pretty simple. You buy a stock and sell it when the price goes up enough for you to be happy (or never, if you just want to keep it for dividends).
Short selling involves a different process. You actually sell a stock that you don't own, and then buy it back later, when the price has dropped enough for you to be happy.
The big question is, "How do you sell a stock that you don't own?"
The answer is that you borrow it from someone who is going long on it.
Let's say that MJ is holding a bunch of Tyson Foods stock (TSN) in his retirement account. He's a long-term investor, since he won't need to sell the stock until he's 65 at the earliest. He doesn't really care about the price fluctuations in the market, since he isn't looking to sell for 35 years.
But I think the price of TSN is going to drop over the next month. This might be because I see the entire market tanking, as it is now, or because I know they just cured Avian Flu, which will create a huge surplus of chicken, driving prices down.
So, I place an order to short 300 shares of TSN. My broker can't close the deal unless he can borrow the shares for me to sell. He looks at MJ's account, and sees that he has 100,000 shares of TSN, so, without even asking, he borrows the shares from MJ.
I sell the shares in the morning, the price drops, and I buy them back next week at a price that is 20% less than I sold them for. My broker gives MJ back his shares, and he's none the wiser.
That is how, in essence, a short sale is completed.
But there's always a risk...
In stocks, you can go "Long" (when you think a stock's price will go up), or "Short" (when you think it will go down).
Going long is pretty simple. You buy a stock and sell it when the price goes up enough for you to be happy (or never, if you just want to keep it for dividends).
Short selling involves a different process. You actually sell a stock that you don't own, and then buy it back later, when the price has dropped enough for you to be happy.
The big question is, "How do you sell a stock that you don't own?"
The answer is that you borrow it from someone who is going long on it.
Let's say that MJ is holding a bunch of Tyson Foods stock (TSN) in his retirement account. He's a long-term investor, since he won't need to sell the stock until he's 65 at the earliest. He doesn't really care about the price fluctuations in the market, since he isn't looking to sell for 35 years.
But I think the price of TSN is going to drop over the next month. This might be because I see the entire market tanking, as it is now, or because I know they just cured Avian Flu, which will create a huge surplus of chicken, driving prices down.
So, I place an order to short 300 shares of TSN. My broker can't close the deal unless he can borrow the shares for me to sell. He looks at MJ's account, and sees that he has 100,000 shares of TSN, so, without even asking, he borrows the shares from MJ.
I sell the shares in the morning, the price drops, and I buy them back next week at a price that is 20% less than I sold them for. My broker gives MJ back his shares, and he's none the wiser.
That is how, in essence, a short sale is completed.
But there's always a risk...
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