What is Short Selling? - dummies

What is Short Selling?

Traditionally, stock market investors and day traders want to buy low and sell high. They buy a position in a security and then wait for the price to go up. This strategy isn’t a bad way to make money, especially because, if the country’s economy continues to grow even a little bit, businesses are going to grow and so are their stocks.

But even in a good economy, some securities go down. The company may be mismanaged, it may sell a product that’s out of favor, or maybe it’s just having a string of bad days. For that matter, maybe it went up a little too much in price, and investors are now coming to their senses. In these situations, you can’t make money buying low and selling high. Instead, you need a way to reverse the situation.

The solution? Selling short. In short — hah! — selling short means that you borrow a security and sell it in hopes of repaying the loan of the shares by buying back cheaper shares later on.

In trading lingo, when you own something, you are considered to be long. When you sell it, you are considered to be short. You don’t have to be long before you go short.