Knowing the Rules of the Shorting Game

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Many of you have communicated to me that you would like to know more about shorting. I usually toss shorting off as "the mirror image" of going long. When you go long -- remember that is the term we use, not "buy" -- you are buying with the idea that a stock will go up.

When you buy, you take it for granted that the stock you buy will be delivered to you. When you sell the stock, you get the difference between the price you paid and the price you sold it at. Your stock is returned automatically to the buyer.

Smarter Money: Join the discussion onTSC Message Boards. Short-selling works the same way. You sell the stock. You buy it back, or "cover," and you get the difference. If it went higher, you lose; if it went lower, you made money.

There is one giant difference, however. When you buy a stock, you know it is going to be delivered to your account. When you sell it short, you don't own the stock, so there is no surety to the process. ...