Short selling lets you profit when stock prices fall by borrowing shares, selling them, then buying them back cheaper. A stock at $100 you sell could drop to $95 for a $5 gain, but if it rises to $110 you lose $10. The risk is unlimited since stocks can climb forever, while your maximum profit is capped at 99% of what you sold it for.
Chapters
Normally, we make money when the prices go up. But guess what? What if I told you we can make money when the stock is going down as well? It's basically like buying something at a higher price and then selling it for cheaper and making money. Sounds crazy, right? Enter short selling, or short for short. If we take a look at the stock market, we can see historically that one-third of the time the stock market has gone down, which means we have a lot of missed opportunities if we only make money when the stock prices go up. Hence, by short selling, we have more opportunities to make money. So like when you profit from buying a stock at a lower price and selling it for a higher price, you can do the opposite with a short sell. The idea behind a short sell is that we borrow the stock from the broker and sell it— hence it's called short. We're short on stocks and then buying it back at a lower price, making the difference as a profit. Sounds crazy, I know. Basically, when we are in a short position, we are betting the stock is going to go down and we will be able to buy it back at the lower price. So for example, let's say we decide to short Apple and the stock is currently trading at $100. We borrow the shares from the broker at $100. If the stock goes down to $95, we make the difference from $100 to $95, which is $5 in profit. If the stock is going to go goes up to $110, for example, that means we will need to cover our short and buy back the shares at that price, making us lose $10. Capisce? Now, I know short selling might sound a little bit complex, and you might not get it 100% yet. So listen up. Let's say a friend of yours comes to you and gives you a brand new iPhone and tells you that you need to give him the iPhone back only in 1 year's time. Now, because we're savvy investors and we know that the price of the iPhone decreases when the new iPhone comes out, we're going to sell the old iPhone right now at retail price. And then once the new iPhone gets released, we're going to rebuy the old iPhone for a cheaper price, making the difference, and give it back to the friend, of course. So let's say we're going to sell this iPhone for $1,000, and then when the new iPhone comes out, we're going to rebuy it at $800, making the difference, which is $200. The same thing applies to stock. Your friend is the broker and the iPhone is the company shares. It's basically selling something you borrowed before you need to give it back and betting the price is going to go down. It is important to note that in a short you can lose more than 100% of your money. Well, that won't happen because the broker will probably liquidate you beforehand. But theoretically, you can lose more money than you can make. In a long position, we can only lose as much as we put in the stock, and the upside— well, there is no end to the upside, basically. But in a short position, we can lose more money, and the upside is only limited to 99%. Short selling can be tricky, so it's important to fully understand it before trying it. It's not for beginners, but it's a useful strategy for experienced traders.
