Basically, short selling of stocks refers the selling of a stock not necessarily owned by the seller. To be more specific, it is the short sale of a security that the seller does not own but promises to deliver anyway. When you short sell a stock, you must have a broker who lends it to you. The stock may come from the brokerage firm’s own inventory, from another brokerage firm, or from one of your brokerage firm’s customers.

When the sale transaction is consummated, the proceeds are deposited into your account. Soon or later, you will be required to “close” the short. Closing the short is accomplished by purchasing the identical number of shares and returning them to whomever lent them to you in the first place. At the time of the purchase closing the short, if the price of the shares is less than when you sold it, you have a profit. Short sellers have a loss when the subsequent price has risen above where it was when the stock was shorted.

It is necessary to have a broker if your plan includes short selling stocks. In order to use a broker’s services, you will be required to establish an account with the brokerage firm as either a cash account or a margin account. With a cash account, you will be expected to pay for your stock at the time of the purchase. Alternatively, if you have set up a margin account with the broker, you are allowed to borrow a portion of the purchase money. The security itself will collateralize the transaction.

In order to short sell, you had to borrow stocks to cover the sale. Whatever terms and benefits a stock may earn, belong to the original stockholder. You incur any activity on a stock, such as a split, and you must pay in full what is owed to the broker.

Now, short selling stock is not for novices as it involves a comprehension of the market and knowledge of the greater risk it entails. When you short a stock, there is theoretically no limit to the amount of money that you could lose. Contrast this to purchasing a stock in the normal fashion, where the maximum that you can lose is limited to whatever you paid for it. Many people do not recommend a short sale because inherent in the sale is your belief that the stock will not do well, which is a nonproductive effort.

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