How Does Shorting a Stock Work?

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Let’s start with simplicity:

Shorting any asset means betting against its value. When the price falls, the value of your position rises.

Have you ever heard of being long a stock? That just means buying the stock, or betting on its value.

Let’s get right into the teeth of this. In two minutes, you’ll have a another tool you can use for that little bit of money you set aside to trade for yourself.

Joe owns a stock worth $100. Steve borrows that stock from Joe.

Steve does not own this stock. He didn’t pay for it. He didn’t buy it from Joe. Joe lent him the shares.

They enter into a contract tat says that Steve has possession of the number of shares they agreed on, but that he has to return them back to Joe in no more than 6 months, or the expiration date of the contract.

So what in the world is Steve trying to do with Joe’s shares and what is Joe doing lending them?

Steve thinks in that 6 month span, the stock will fall to $90 a share. On day one, he borrows the shares and immediately sells them at market price. That’s an inflow to Steve’s account of $100.

In order to return the shares to Joe within that 6 month period, Steve has to buy them back. He sure hopes he doesn’t have to buy them back at $100 or more.

See the rest of the example in the quick video above. And don't forget to start shorting stocks when you're done with this video. 

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