WHAT IS SHORT SELLING? | Stock Market Explained & More! - YouTube

Would you believe us if we told you there's tons of money to be made by

investing in bad companies? And we don't mean evil corporations; we mean companies

that are failing. You see, most people wouldn't think of buying stocks in a

company that's about to collapse. But that's exactly what short sellers do.

They trade in undesirable stocks, or, more precisely, stocks that are about to

become undesirable. It's super confusing, but don't worry! In the next couple of

minutes we'll demystify short selling and explain why this risky branch of

stock trading can be so lucrative.

Let's start with the basics: What does 'shorting a stock' actually mean,

and how does it differ from 'going long'? Put simply, short selling is betting

against a stock. It's the exact opposite of traditional long selling. When you

short sell, you predict that a stock will lose its value sometime in the future, so

you borrow it and sell it when you think its price has peaked. You're probably asking

yourself: "How can you sell something you've borrowed?" Here's how: When you

borrow a stock, it's technically yours to do with as you please. But, at some point

you WILL have to give it back to its original owner.

There are also some strings attached - but we'll talk about them a bit later. For

now, just remember that when you borrow a stock, you own it temporarily. Now that

the stock is technically in your possession, you need to sell it before

its value drops. Selling the stock while its value is at its highest is a crucial

aspect of short selling. When you sell the stock, you'll get an amount of money

that equals the stock's current worth. Obviously. Now all you need to do is hang

on to this money and wait for the stock's price to drop. When the price

drops, you buy the stock for real, give it back to the person you

borrowed it from, and keep the difference. So imagine if the stock's value fell to

$0, you'd get to keep everything! Pretty

sweet, huh? If you were to successfully short sell hundreds or even thousands of

stocks, you'd strike it rich. YEE-HAW! Whoah there cowboy,

hold your horses! Don't start scouting for shrinking companies just yet!

First, you need to know just how risky short selling is. Spoiler alert: It might

be the riskiest thing you ever do. Like, even riskier than swimming in a swamp

full of alligators. Please don't go swimming in a swamp full of alligators.

The first way short selling can come back to bite you where the sun don't shine is

when you get your prediction wrong. Instead of falling the price rises and

YOU LOSE. The more the price rises, the more money

you have to spend to buy back the stock. And remember, you absolutely MUST give it

back to its actual owner. Theoretically, this way you could lose an infinite

amount of money, since there's no limit to how much the stock price can grow!

"Okay," you might think, "no biggie. I'll just wait until the price starts

dropping and give it back then, so I don't lose any money. I might even make a

profit after all!" Not necessarily. You see, there's another way short selling could

backfire on you; the lender can ask for the stock back AT ANY POINT. This most

unwelcome of outcomes means you've now wasted not only your time, but your money, too.

That's because even if the price remains exactly the same, there are still

costs you have to pay for borrowing a stock. That sucks.

However, there is a silver lining to all this. Remember how we said that you could

lose an unlimited amount of money in theory? The reason why we added 'in theory'

is because there's something that significantly diminishes the possibility

of you suffering such massive losses; it's called maintenance margins. Here's

how they work. To be able to short sell a stock, you first have to deposit a

certain amount of your own money as a "buffer". This money is used to cover

potential losses. Naturally, it's still your money; it's just there as insurance

in case anything goes wrong. That gives both parties some breathing

space if the worst comes to the worst. Now that we know exactly how short

selling works, we need to address the question that's on everyone's mind:

Is the potential for profit worth the unlimited risk? That all depends on how

experienced you are. If you're a battle-hardened Wall Street trader, you

can earn a fortune by successfully shorting a stock. But if you have no idea

what you're doing, you could lose everything. Of course, sometimes even the

experts get it wrong and lose an amount of money that's tough to earn back.

So does that mean shorting is only for finance legends like George Soros? Nope.

Short selling is a well-established part of stock trading. Experienced traders

combine both short and long selling to get the maximum

out of their investments. That said, as with all risky business in the world of

finance, short selling is best approached with caution, patience, and above all,

experience.