Short selling is a method of stock trading that allows investors to profit from an investment vehicle that is going down in value and that they do not own. To be able to short sell a stock, a trader needs to borrow the stock from someone who owns it (though the brokerage or investment firm) and sells it, hoping to repay the loan of the stock by buying the shares for a lower price in the future. Said another way, if the price goes down as the trader hope, they buy back the same asset, now at a lower price and pocket the difference as profit. While short selling comes with potentials risks, it can be a profitable way to trade.
Also known as shorting a stock, this approach to stock trading may seem counterintuitive, especially to typical long-term investors. Since stocks are known to go up over time (though of course there are corrections and small hiccups), many traders with a long horizon, buy assets with the expectation that they will hold onto them for a long time. It may be a good or not so good financial investment decision, as major corrections and timing issues, as well as the quality of the asset they invest in and potential political events, influence the “success” of the investment.
But shorting a stock might be a wise move for traders with a shorter trading perspective. How do you borrow a stock to short sell? This is how short selling works:
Short selling stocks can be useful for traders who have a particular trading strategy or have identified a certain security they believe will go down in price. Some people look for companies they think are poised to go down in value, perhaps the shares of companies that are mismanaged or are going through a rough spot, or recently had a large upswing in price. Many brokerage investment firms assist traders who want to short sell, finding the shares to borrow, loaning the money needed to borrow the stock, and arranging the entire procedure.