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This is a discussion on Shorting within the First Steps forums, part of the Reception category; Hi i have searched around the forums and knowledge base trying to find an explanation of shorting i dont understand ...

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Old Nov 11, 2005, 2:51am   #1
 
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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!
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Old Nov 11, 2005, 5:01am   #2
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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.
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Old Nov 11, 2005, 7:19am   #3
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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.
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Old Nov 11, 2005, 7:23am   #4
 
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jay2k started this thread 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.
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Old Nov 11, 2005, 7:36am   #5
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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.
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Old Nov 11, 2005, 7:37am   #6
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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.
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Old Nov 14, 2005, 1:01am   #7
 
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jay2k started this thread thanks everyone for the comments they were very helpful.
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Old Nov 14, 2005, 9:01am   #8
 
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Same principle in futures except you dont need to borrow anything to short a futures contract.
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Old Dec 29, 2005, 7:11am   #9
 
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thanks everyone for the comments they were very helpful.
DO NOT short until you fully understand it. shorting is a dangerous thing to do, even with stop loss.

an alternative is to buy put option, which is a lot of safer, but you are paying for volatility and time.

these are concepts to be found on all trading books, i recommend to read one before making your first trade. For books, do NOT buy any book starts with something like "I have become financially independ after discovering this trading strategy, now you can do the same, yada yada" make sure the book look academic.
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Old Dec 29, 2005, 9:47am   #10
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DO NOT short until you fully understand it. shorting is a dangerous thing to do, even with stop loss.
an alternative is to buy put option, which is a lot of safer, but you are paying for volatility and time.
Hi cwang,
The principle of not embarking on a course of action until you understand it fully is sound advice, IMO. However, to imply that instigating a short position is in some way more dangerous than a long position puzzles me. Trading long or short is a dangerous activity if you don't know what you're doing. Given that most instruments have a general propensity to fall faster and further than they rise, some folks would argue that, if anything, going short the market is marginally safer than going long.

To recommend trading options as a safer alternative to shorting, strikes me as being a highly questionable piece of advice. F.H. "Chick" Goslin in his celebrated book 'Trading Day by Day' writes: "Options are one of the greatest and most costly frauds perpetrated on the trading public. [They] have limited risk for the buyer and unlimited risk for the seller. Therefore, it is only natural that individual speculators tend overwhelmingly to buy rather than sell them. Unfortunately for the individual trader, the buy side of options has a significant built-in disadvantage. The very nature of options, as currently set up, is such that the odds are inherently stacked against the buyer (primarily small speculators) and in favour of the seller (usually big, institutional money)".
Tim.
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