Stocks
1:37
What Is Short Selling? | Shorting Explained
Short selling is, in short, when you bet against a stock's success. Learn all about shorting in this video from Titan's Christopher Seifel.
Video Transcript
If you've ever heard the saying buy low, sell high, you already know the basics of investing in the stock market. You buy when the price of shares are low, wait for your stocks value to increase and sell it for a profit. But what about profiting from a stock's decrease in value? Is there a way to do that? The short answer is yes. And it's called shorting or short selling. Investors will short a stock when they believe the stock price is going to go down. Here's a hypothetical example of short selling. There's a company called XYZ that's currently valued at $100 a share. You borrow 100 shares at $100 per share and then sell the shares for a total of $10,000.
Let's say you're correct in your speculation and XYZ stock price drops to $70 per share. You then buy back the 100 shares for $7,000 and return the borrowed shares to the lender. That leaves you with a $3,000 profit, which is the difference of the $10,000 you originally received, less the $7,000 you paid to buy back the shares or cover your short. In this admittedly simple example, the stock price went down and the investor made money. Here's the catch. Shorting has higher transaction costs and potential for infinite losses if a stock continues to go up. Shorting is high risk, potentially high reward. Fun fact, the movie, The Big Short, covers a group of investors who bet the housing market was going to crash. And it did.
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