What is Shorting?

Hello from the Finance Club 2014 Officers!

President: This is the education blog, which is written by our VP. Usually, this one will be published on Sundays. So, for our first issue… what does SHORTING a stock mean?

Vice President: Shorting a stock is method by which one can make the most money if the stock goes DOWN. We have all heard the phrase “buy low, sell high.” This is the same idea in reverse, so our goal in shorting is to “sell high, buy low.” In order to do this, we would:

  1. Borrow shares of a stock (typically from a broker).
  2. Sell the shares on the open market.
  3. Wait for the stock price to decrease.
  4. Once the stock price has decreased, buy the same number of shares from the open market.
  5. Repay those shares to our lender to close the trade.

Shorting diagram

For example, Jason, a value investor, believes that QRS stock, currently trading at $70, is heavily overvalued. To short the QRS stock, he first borrows 100 shares from his broker. He then sells his borrowed shares of QRS on the open market for $70 * 100 = $7,000. Eventually, he must buy back the shares from the market to repay his broker. Three months later, when the price of QRS falls to $55 a share, Jason buys 100 shares from the open market for $55 * 100 = $5,500. Finally, he gives his broker the shares he just bought to close the trade. Through shorting, Jason has realized (or made) a profit of $7000 – $5500 = $1500. Of course, there are commissions.

In order to short a stock on our stock simulator:

  1. Go to www.wallstreetsurvivor.com and log in.
  2. Scroll down to the section that says Make a Trade and click on the title.
  3. Type in the stock to be shorted in the search bar.
  4. When it asks if you want to buy or sell, expand the bar and click Short.
  5. Decide the type of order you want and how many shares you want to short.
  6. Make the trade.

To close the trade:

  1. When it asks if you want to buy or sell, expand the bar and click Cover.
  2. Enter in the same number of shares you previously shorted.
  3. Decide the type of order you want (ex. limit, market, etc.)
  4. Click the Trade button to close the trade.

– Ken Croker, VP.