Q: Our team has a question for you about short selling. We don't really understand the logic buying a stock and then selling it. Even if the price of the stock goes back down, you have to buy it back. In the end how does that make any money? Doesn't that actually lose money?
A:The way to look at how short selling works is this:
Let's say you think that the price of XYZ Company is too expensive and is going to fall soon. You call your broker (CSU East Bay) and say sell short 100 shares of XYZ Company at a price of $50 per share.
First, the broker doesn't require that you buy the stock to sell short, instead the broker is going to lend you the 100 shares temporarily. After the broker lends you the 100 shares the broker will also find someone who is interested in buying the same 100 shares.
After someone buys the 100 shares from the broker, you have the ability to buy back the 100 shares that the broker sold to someone else at any time you want. If the price goes up then you lose money. If the price goes down then you make money.
If the stock goes up to $51 then the short seller loses a total of $100 while the person who bought the stock made $100. If the stock goes down to $49 then the short seller makes $100 while the person who bought XYZ Company loses $100.
I can understand your confusion with this process since we never get to do exactly the same thing in real life. However, you could think of this process this way...Let's say you know that the newest iPhone is too expensive and will eventually go down in price. The store that bought the iPhones thought that everyone would want one.
When the store couldn't sell enough iPhones for a profit the store decided to get rid of the rest of the phones at a 50% discount. You then decide that at half off the regular price it is worth buying the phone. In this example, the store is the one that loses the money while you are the one who "makes" or saves the money when the price falls. If you bought the phone right away and paid top dollar then you would have been the one who lost money since you could have paid a lower price and used the rest of the money for something else. At the same time the store is the one that makes the money because you were willing to pay the higher price when the phone first came out.
Short selling is the opposite of buying a stock and works only if you think that a stock is going to fall in price. Please click on the link at Investopedia.com for more info on the basic concept of short selling. I highly recommend that you sell short a company that you think might fall so that you can get a better idea of how it works. Since the money isn't yours you get the benefit of learning without losing.
I hope my answer is useful. Good luck.
A:The way to look at how short selling works is this:
Let's say you think that the price of XYZ Company is too expensive and is going to fall soon. You call your broker (CSU East Bay) and say sell short 100 shares of XYZ Company at a price of $50 per share.
First, the broker doesn't require that you buy the stock to sell short, instead the broker is going to lend you the 100 shares temporarily. After the broker lends you the 100 shares the broker will also find someone who is interested in buying the same 100 shares.
After someone buys the 100 shares from the broker, you have the ability to buy back the 100 shares that the broker sold to someone else at any time you want. If the price goes up then you lose money. If the price goes down then you make money.
If the stock goes up to $51 then the short seller loses a total of $100 while the person who bought the stock made $100. If the stock goes down to $49 then the short seller makes $100 while the person who bought XYZ Company loses $100.
I can understand your confusion with this process since we never get to do exactly the same thing in real life. However, you could think of this process this way...Let's say you know that the newest iPhone is too expensive and will eventually go down in price. The store that bought the iPhones thought that everyone would want one.
When the store couldn't sell enough iPhones for a profit the store decided to get rid of the rest of the phones at a 50% discount. You then decide that at half off the regular price it is worth buying the phone. In this example, the store is the one that loses the money while you are the one who "makes" or saves the money when the price falls. If you bought the phone right away and paid top dollar then you would have been the one who lost money since you could have paid a lower price and used the rest of the money for something else. At the same time the store is the one that makes the money because you were willing to pay the higher price when the phone first came out.
Short selling is the opposite of buying a stock and works only if you think that a stock is going to fall in price. Please click on the link at Investopedia.com for more info on the basic concept of short selling. I highly recommend that you sell short a company that you think might fall so that you can get a better idea of how it works. Since the money isn't yours you get the benefit of learning without losing.
I hope my answer is useful. Good luck.
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