Can you please truly explain like I’m five? Like with bubblegum or cookies as an example? Because I have tried understanding how this works several times and I just do not get it.
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Shorting a stock is just a catchall for any investment where you *gain* money if the stock *loses* value.
In practice, imagine I’m selling mint bubblegum today for $1 a piece. You hear that next week there will be a new kind of bubblegum released, Cherry flavour. You think, “huh, I bet nobody will want to buy mint bubblegum once Cherry comes out – I bet that mint bubblegum will be cheaper in a week.”
So you come to me and say, “Hey, can I borrow a piece of mint gum? I’ll give you a piece of mint gum back next week!” And I say, “Sure, here’s a piece of the mint gum, but you have to pay me 5 cents to lend it to you.”
So now you have a piece of mint gum that cost you 5 cents, and you owe me a piece of mint gum. You go and sell that gum for $1 (the current going price), so now you have a profit of 95 cents (a dollar less the 5 cents to borrow the gum).
Next week rolls around, Cherry gum is released, and now mint gum is SUPER cheap – say, 25 cents a piece. You still owe me a piece of mint gum, so you buy a piece for 25 cents and give me the gum. Now you have 70 cents (one dollar from selling the gum less 5 cents to borrow the gum and 25 cents to buy the replacement gum), which is a profit you earned *because the price of mint gum went down*. That’s the most simple kind of short sale, but there are other ways to short a stock (namely through futures/derivative contracts, which I can get into if you’d like).
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