Short selling, or shorting a stock, is a somewhat speculative investing strategy where you profit from the stock price going down. When you short a stock, you’re selling a stock you don’t yet own–rather, it’s lent to you by a brokerage house for a specific period of time. At some point, you must pay back the lender; if at the point you pay it back the stock price is lower than it was when you sold your unowned stock, you profit because you are paying back the lender with stocks bought at a cheaper price than when you sold them. However, if the stock price rises, you end up with a loss.

Shorting a stock is considered speculative because the general trend of the market is upward. You only make money on a short by a stock price heading downward, which is the minority of the time. Some investors also short to hedge against a market downturn.

Shorting stocks made news recently because in a highly controversial move, the Securities and Exchange Commission temporarily banned short selling a large number of stocks, mostly in the financial sector. Short selling, while somewhat speculative, is a normal part of stock market operations. It seems to me that this is another example of the government trying to limit stock market losses that’s likely doomed to make things worse in the end–my opinion, of course.

One Response to “Working Backwards: What’s Short Selling?”

  1. 108th Edition of the Festival of Stockson 29 Sep 2008 at 5:26 am

    [...] Working Backwards: What’s Short Selling? posted at Uncommon Cents. Wondering what all the fuss is about short selling? This post covers the basics including the latest SEC restrictions on this practice. [...]

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