Short Selling

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Jeffery Hunt
Jeffery Hunt's picture
Short Selling

Hi guys,

I'm having trouble understanding how it's done. I get it that I'm selling the option at a certain price and then buying it again at a lower price but what do you mean by "Borrowing the stock" ?

If the stock is not main how I'm able to sell it?

I would really appreciate if you could elaborate your explanation on the process.

Thank you in advance .

Jason Pride
Jason Pride's picture

Hi Jeffery,

In order to short sell you actually have to borrow the security from its owner. Generally this would be a large institutional investor.

To make a short sale you:
1 - Borrow the stock from the owner and pay them a fee per share
2 - Sell the stock on the open market for current price
3 - Hold or invest the funds from the sale
4 - Buy new shares on the open market (hopefully now at a lower price than you sold for)
5 - Return the shares to the original owner

The premium you pay to borrow the stock may be prohibitively high. As you can see the owner may be left holding a worthless stock in the end. Worse, that owner does not have the ability to sell the stock when they see the price begin to dip as you are currently holding it.