What Does Shorting a Stock Mean?

Short sellers get the profit created by selling high and buying low.

"Shorting a stock" is another term for selling a stock short. Short selling refers to the practice of selling a stock when one believes the price will drop.

Short Sale Conditions

Unlike most investors, short sellers generally seek out stocks whose value will soon decrease. This perceived decrease may be due to conditions within the company, a general feeling that the market has overvalued a stock, or deteriorating market conditions that seem likely to reduce the value of many stocks.

How Shorting Works

Most short sellers work through a broker, or some other type of lender. This intermediary "sells" the stock for the short seller, although the short seller doesn't own it yet; this makes the seller "short" in this stock. Then the short seller needs to buy the stock (theoretically at a lower price, if the stock has dropped) and pay back the intermediary. Brokers often charge interest or other fees for their services in a short sale.

Purpose of Shorting

Because a short seller generally sells a stock at a higher price than that at which he must buy it later, he makes his profit from the difference between the prices at which he sold and bought the stock.

References

• "Securities Regulation, Cases and Materials, Eleventh Edition"; Coffee, John C. and Hillary A. Sale; Foundation Press; 2009
• Trading Markets: Ten Things You Must Know Before Shorting a Stock
• Securities and Exchange Commission: Short Sales