Traditionally, investors and traders want to buy low and sell high. They buy a position in a security and then wait for the price to go up.
But even in a good economy, some securities go down. For that matter, maybe it went up a little too much in price, and now investors are coming to their senses.
If only there were a way to reverse the situation. Well, there is a way selling short. And in short hah! In trading lingo, when you own something, you are considered to be long. When you sell it, you are considered to be short.
Most brokerage firms make it easy to sell short. You simply place an order to sell the stock, and the broker asks whether you are selling shares that you own or selling short. Once you place the order, the brokerage firm goes about borrowing shares for you to sell. It loans the shares to your account and executes the sell order. Sometimes, so many people have sold a stock short that there are no shares to borrow. Once the shares are sold, you wait until the security goes down in price, then you buy the shares in the market at a bargain.
These purchased shares are then returned to the broker to pay the loan, and you keep the difference between where you sold and where you bought less interest, of course. The stock exchanges are in the business of helping companies raise money, so they have rules in place to help maintain an upward bias in the stock market. That can work against the short seller. The interest and fees that the broker charges those who borrow stock accrue to the broker, not to the person who actually owns the stock.
The Art of Short Selling.More...