What is “Short-Selling”

Question

I just cannot, for the life of me, understand how you make a profit by it.

In: Economics

Answer 1

Here are the basic steps to short selling:

– Borrow shares and sell them at market price

– Wait for stock to go down in price

– Buy shares to return ones borrowed, at a lower price.

– Difference between what you initially sold shares for and what you spent to replace them is your profit.

Imagine you shorted 100 shares of a stock trading at $10. You now have $1000 but still owe the return of shares borrowed. A couple months later, the stock is trading at $7. You buy the 100 shares to cover your short, spending $700. The $300 difference between the $1000 and $700 is your profit.