What is a short selling in the stock market?

Answer 1

A market transaction in which an investor sells borrowed securities in anticipation of a price decline and is required to return an equal amount of shares at some point in the future.

The payoff to selling short is the opposite of a long position. A short seller will make money if the stock goes down in price, while a long position makes money when the stock goes up. The profit that the investor receives is equal to the value of the sold borrowed shares less the cost of repurchasing the borrowed shares.

Answer 2

Short selling stocks is the most misunderstood and under-utilized of stock trading techniques.

The idea of making money because of a stock price dropping, seems very foreign and down-right doesn't seem to make sense to most people.

Many stock investors feel it's un-ethical to sell short. They seem to believe we have to root for our companies to do well. Since most people in the Stock Market have a natural tendency toward optimism, selling short is often viewed as being negative.

The fact is, there is absolutely nothing wrong with recognizing the reality of both the marketplace and economy.

Cycles are a fact of life. In the same way that it's rational to sell and avoid a large loss when a stock starts to decline, it's also reasonable to profit from that decline.

So what is short selling?

Selling stocks short is placing a sell order for shares you do NOT currently own, in the expectation that the share price will drop in the future.

For example, if you sell short company XYZ at $30, you simply borrow the shares from your stock broker for delivery to another buyer. If XYZ drops to $20, you then buy XYZ stock shares to replace those you owe your broker.

And in the process you make $10 a share.