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Strategies & Market Trends : SHorting Stocks: Education/strategies/techniques
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To: Early Bird who wrote ()2/22/1997 7:23:00 PM
From: Early Bird   of 99
 
The Following is from Avid info.com:

What is short-selling?

"Buy low, sell high," but not necessarily in that order. The easiest point of reference to
understand short-selling (or selling short) is that it is the opposite of buying. So let us first answer
the question, "What is buying?" When you buy 100 shares of XYZ stock, you are paying the seller
of those shares so that you may own it. You do this because you believe -- for whatever reason --
that those shares' price will rise, allowing you the opportunity to sell at a higher price. The new buyer
would then give you money reflecting that higher price, and the difference between that and what you
initially paid for the shares would represent your profit.

If short-selling is the opposite, then the first step is to sell 100 shares of XYZ because you believe
that those shares' price will fall. But where did you get those shares to sell? It is at this early point of
the explanation that most people become confused, and walk away from the potential profits and
portfolio diversification that shorting offers, out of their ignorance mis-labeling the tactic as "risky".
Yet, the answer is really quite simple: You were able to sell those shares that you did not own
because you borrowed them. (Perhaps if we considered in our definition of buying a stock that you
did not have the money to begin with, so you had to borrow it, the reverse-analogy would be even
more clear.)
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