Shorting

Hi i have searched around the forums and knowledge base trying to find an explanation of shorting i dont understand how it works could someone please explain thanks!

Suppose a stock is trading at $10. You think it will go down but don't own any. You borrow some and sell them at $10. It drops to $9. You buy the number of shares you borrowed, return them to the lender (Known as covering). You pocket $1 per share.

All this borrowing and covering happens transparently via your broker. All you see is a position of eg -100 shares if you are short as compared to 100 shares if you were long.

To expand on the response from dcraig1 - when you go Long, you BUY and then SELL to close. When you short a stock (not all stocks can be shorted), you SELL then BUY to close. In both situations you close your open position by effectively taking an opposite position of equal size.

but how is it that you gain from a loss, because if your borrowing that money aren't you losing it when the share price goes down.

You don't own any shares, except momentarily. You've borrowed shares and immediately sold them, then some time later bought them and immediately give them back to the lender.

eg Sell 100 shares @ $10.00 - receive $1000 from the buyer
Buy 100 shares @ $9.00 - pay $900 to the seller

You are $100 better off.

Forget the borrowing.

Long. BUY at $20. Sell at $25. Profit $5.
Long. BUY at $20. Sell at $15. Loss $5.

Short. SELL at $20. BUY at $15. Profit $5.
Short. SELL at $20. BUY at $25. Loss $5.

If you think the stock, currency, index, commodity is going to decrease in value, then you short it - SELL now and BUY back (to cover) more cheaply later.

If you think it's going to increase in value BUY now and SELL at a higher price later.

That's the theory. In practise it doesn't always work out that way.

thanks everyone for the comments they were very helpful.

Same principle in futures except you dont need to borrow anything to short a futures contract.