Simple Short Selling Examples

Timothy Sykes might be known for being the king of short selling stocks but he isn’t the the king of giving short selling examples that a kindergartner can understand. I can’t lie, there isn’t a week that goes by that someone doesn’t ask what is short selling. For some reason it seems so foreign. Some might even call it un-American. Honestly, it’s neither of those things and is quite simple once I you finish reading the examples below. However, before we get into the short selling examples, let’s answer the question what is short selling a stock and what does it actually mean?

Wikipedia Short Selling Definition

“Short selling (also known as shorting or going short) is the practice of selling securities or other financial instruments that are not currently owned, and subsequently repurchasing them.”  Click here to read more.

Investopedia Short Selling Definition

“Short selling is the selling of a stock that the seller doesn’t own. More specifically, a short sale is the sale of a security that isn’t owned by the seller, but that is promised to be delivered.” Click here to read more.

Dictionary Short Selling Definition

“Borrowing shares of stock from a brokerage firm and then selling in the expectation that the price of the stock will decline.” Click here to read more.

Are you confused yet? Yeah I know how you feel but those are the basic dictionary definitions and do not give short selling examples that a kindergartner can understand. Regardless of what you do know (or don’t) about the stock market you should know the basic definition of short selling so you understand what you are doing if you decide to explore making money with this technique.

Ok now before we get started with a couple of simple real life examples keep in mind that these are not picture perfect examples. Instead, they are examples to help give you the basic gist or idea of short selling stocks. They are only to be used for your understanding of the concept and nothing else. Let’s begin.

Simple Short Selling Examples – #1

Your friend Johnny just bought a $200 bike. Coincidentally your neighbor Ralph is looking for a similar bike. Knowing all about bike deals you ask to borrow Johnny’s bike and you sell it to Ralph for $200. After the sale is complete you go to the local bike shop and buy the same bike you borrowed from Johnny and sold to Ralph for $150. To close out the deal you give the new bike to Johnny to replace the borrowed one and keep the $50 profit. You just short sold the bike.

Problems That Can Arise from Example #1

  • Johnny might not let you borrow the bike. (This is known as not being able to borrow shares to short.)
  • The sale on the bike might have ended forcing you to purchase it at a higher price than you sold it. (This is known as a short squeeze.)
  • Johnny calls immediately to get his bike back. (This is known as a buy-in.)

Simple Short Selling Examples – #2

Your best friend wants an Elmo doll to give to his son for Christmas but he can’t seem to find one anywhere. However, you know your nephew has an Elmo doll so you ask him to borrow it until the new year. Then you go back to your best friend and sell him the doll for $50 so he can make his son happy on Christmas. Unbeknownst to everyone but you there is a sale on Elmo dolls so you purchase it for $35. You then give back the borrowed doll to your nephew and keep the $15.

Problems That Can Arise from Example #2

  • Your nephew throws a tantrum and says NO you can’t borrow Elmo. (This is known as not being able to borrow shares to short.)
  • The sale ended early because everyone wants Elmo forcing you to buy at any price.  (This is known as a short squeeze.)
  • Your nephew calls crying how he can’t sleep without Elmo and needs him back immediately. (This is known as a buy-in.)

Simple Short Selling Examples – #3

Let’s say your fiance has a copy of Conan the Barbarian and claims it’s her favorite movie of all time. The first thing you should do is ask yourself is why is your soon to be wife into Arnold Schwarzenegger from 1982. Regardless, let’s say you convince her to loan it to you for a few days.

At some point you will have to return it to her — I mean, not really since you will soon be married — but assuming you’re a decent person you’ll eventually give it back.

Now, let’s say that you take the copy you borrowed and sell it to your ex for $10.00. Hopefully your finance never finds out, however, you still owe your her Conan the Barbarian, so you order a copy on-line for $8.00.

When the DVD arrives you return it to your fiance, keeping the difference between what you sold it for ($10.00), and what you bought it back for ($8.00).

Problems That Can Arise from Example #3

  • Your fiance calls off the wedding because she can’t let go of the 80’s and says it’s OVER! (This is known as not being able to borrow shares to short.)
  • Nobody has Conan the Barbarian so you go crazy looking all over for it paying whatever it costs.  (This is known as a short squeeze.)
  • Your fiance calls and says she needs Arnold immediately as she can’t sleep knowing he is no longer with her. (This is known as a buy-in.)

Final Thoughts

Short selling really isn’t that difficult to understand but those short selling examples were just fun examples and should just help get you to a better place of understanding. Interestingly, the term “don’t sell yourself short” comes from short selling stock which has a whole new meaning to me after all these years of hearing it.

Hopefully you do too.

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Important Resources

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  • If you are new to stock trading test your knowledge here with a basic stock market quiz.
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