About Shorting Stocks

Video Transcript

"Alright this is John Pinelli, financial representative and today we're going to be talking about shorting stocks. What does it mean to short a stock and how does the individual transaction take place. So when you're shorting a stock, you're basically betting that the stock is going to go down in value. Now the way that works is you are in essence borrowing the shares from your brokerage who will hold them on account for you and then you are selling those shares today in the open market. So when you're selling those shares, you're hoping that you're selling it at a very high price so that what you can do is then buy the shares back from your brokerage at a lower price. So in essence you want to if a stock is trading now at 50 dollars and you think it's reached it's peak, you want to sell those shares at 50 dollars, borrow them from your brokerage with the intention of then paying that back by buying those shares back at a lower price. So when the stock would go down to say 30 dollars you would buy them back at that price and then make that difference between 50 and 30. Traditionally short stock sellers have been considered frowned upon in Wall Street because they're not really investing in the well being of the company, they're actually betting that the company's going to fail or go down or do poorly. So for many traditional investors who are buying stock investing in the well being of the company, they are sort of met on the opposition by these shorts who are driving the prices down. Now another way of shorting that's out there is naked shorting and naked shorting is legal in many places but basically what it is is without borrowing the shares from the brokerage, the individual will simply sell the shares that they don't own with the obligation of buying those shares back at a later date. Now the reason this is legal is because a person can short the stock and then the stock could continue to rise and rise and rise and that person would be on the line for that money but may not have the funds to pay that. Which brings me to another point which is that when you are shorting the stock your losses are potentially unlimited because you are selling a stock at a certain price with the obligation of buying it back. So remember if you're thinking about shorting that you're essentially your losses are unlimited and that you're on the line for potentially a lot of money. So this has been John Pinelli talking to you today about shorting."