D. JewelAssistant Manager, MA in English, California
Assistant Manager, MA in English, California
Answered on Oct 16, 2019
I will try as much as possible to explain this using a perfect example. But before then, when you see investors using the term 'shorting a stock,' they are just craving for a situation in which they will be able to sell their shares at a rate higher than the rate those shares were borrowed. The good thing here is that you are going to make a profit from what you borrowed. Let's consider the example I talked about.
Let's assume a share is currently being sold at the rate of $40, and you borrow a total of 100 shares from a broker. If you sell the 100 shares at this rate, then you have $4000. Let us also assume that after a while, the price of a share drops to $30. So, what shorting a stock now means is that you are willing to return the 100 shares you borrowed at this rate. Returning the 100 shares at this rate means you have a difference of $1000 as profit.
When investors short a stock or sell short as it is sometimes referred means someone has borrowed shares from someone else who owns the same stock in the same company. The borrower promises to replace the borrowed stock at some point in the future.
He/she then sells the shares and hopes he/she can buy the stock back later at a much lower prices, return the borrowed shares, and make a profit. Lenders participating in short selling are betting the stocks will go up. Investors participating as the borrowers, are hoping the prices will go down. Short selling has advantages and disadvantages for investors on both sides.