Eli5: What’s and how shorting a stock is/works?
In: 5
Everybody here has already covered short positions from borrowing stocks, but I’d just add that in general, a “short” position is any position where you make money from a decrease in price of the underlying asset, and there are a few ways you can do it.
A few examples, all based on shorting a single stock currently selling for $50:
– You can borrow the stock and sell it for $50. As discussed in the other comments, if the price drops, you buy the stock back and repay your loan.
– You can make a deal to sell someone a stock for a given price at a given date, for example, $45 one month from now. If the stock price falls to, say, $40, you buy the stock and sell it for $45 at the closing date. If the stock stays at $50, you still have to sell it for $45 at the closing date (losing $5).
– You can buy an option to sell a stock at a given date for a given price. Similar to the above example, but this time, you might pay $3 for the *option* to sell a stock for $45 in one month. If the stock falls to $40, you make $2 ($5 profit less the $2 you paid for the option). If the stock stays at $50, you don’t exercise the option and you lose $3 (the price you paid for the option) as opposed to $5 (your losses under the contract option above).
– You can sell someone the option to buy a stock from you in the future. This time, someone pays you $3 for the option to buy the stock at $45 one month from now. If the price stays at $50, you lose $2 (you sold the stock at a $5 discount, but you made $3 selling the option). If the stock falls below $45, you make $3 (the buyer will just buy the stock for cheap on the open market, and you keep the price they paid for the contract).
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