Timothy Sykes is probably the king of short selling stocks. If he is not the king then he is a top contender who has redefined the way we look at making money in the stock market. So, the question is what is short selling a stock and what does it mean? Well, before I get into a couple of simple real life examples let’s see how 3 top websites define short selling stock.
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 of short selling a stock or security. 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 Sell Example #1
Your friend Johnny just bought a $200 bike. Coincidently 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 Sell Example #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.)
Were the simple short selling stock examples clear to understand? Do you think you have a better grasp of the concept now? If you don’t throw me a comment below and I will help try to clear things up.