To The Moon

Almost all investors will never short a stock, it’s mostly professionals.

If you buy 100 shares of XYZ at $50 per share, you pay $5,000 (let’s forget buying on margin, borrowing money from your broker to pay for the shares). Your risk is $5,000 if the stock goes to zero (unlikely, but that’s the risk). Let’s ignore that you are entitled to voting rights as a shareholder, you could receive a dividend if one is paid. Your outlook is the stock price will go higher, hopefully considerably higher.

Someone shorting those shares (Trader A) has the opposite outlook. The stock is at $50, they think the shares will go down 40% to $30 per share,They do not own any shares. They sell 100 shares of XYZ at $50. Their broker has to go out andborrow100 shares from someone who owns 100 shares. The person who loans the shares (it could be Vanguard, Black Rock, Fidelity, etc.) to Trader A’s broker charges Trader A’s broker interest. Trader A pays that interest charge and an additional few percentage points to his broker. You may hear the term “broker loan”, interest charges and fees charged for services or loaned money. This is a HUGE profit center for brokerage firms.

Let’s get back to Trader A and his short 100 shares of XYZ. He has “unlimited risk”, not likely but what if there is a bidding war tomorrow and the shares open at $120? His broker will have Trader A put up margin in case something like that happens.

Trader A’s intention was to buy the shares at a lower price, hopefully $30 per share. The stock fell to $36 a month later. Trader A is still short 100 shares. There is great news and the market is rallying 3% to 4%. XYZ has rallied to $40, Trader A, not sure how high XYZ shares will go and needing to buy back those shares at some point, decides the time is now, and buys back 100 shares at $40 per share. This is where you might hear the term “short covering rally”. Trader A’s broker will return those100 shares to Vanguard or whoever, Trader A who sold and then bought back 100 shares, has no position in XYZ.

Shorting stock is risky, has fees and charges, and with the amount of risk is not suitable for everyone, especially to those new to trading. Good luck. mk

https://www.quora.com/profile/Marty-Kearney-5