How does stock shorting work?

Question

Specifically, how does one “borrow” or “sell” stock they don’t actually own?

In: 8

Answer 1

I borrow your rare Pokemon card it’s worth about $1000. I pay you $30 a week to borrow it.

I immediately sell it on eBay. For $980.

I now hope to be able to find this card on eBay again for less than $980.

Let’s say a big collector decided to sell their entire collection. This tanks the price of Pokemon cards in general. I nab the same card you had for $700.

So I return the card to you. Pay you $30 for the week I borrowed it as well so I made $250.

That’s how shorts win. Let’s see how they lose

Lets say Pokemon cards are hot again.

Now the card you had is worth $2000 up from $1000 a week ago. You start getting mad that I haven’t returned it. Even though I paid you $30. But that became $60 $90$ $120 you want the card back because you know the value skyrocketed.

Finally after $150 in borrow fees you get pissed and demand the card back..I am now forced to buy it immediately and that means I’m buying it for the $2000 market price.