Short selling of stocks...?

[andyoxon]

How does it work,  in simple terms...?  How do you sell stocks that you don't have?
http://www.guardian.co.uk/business/2008/apr/04/bearstearns.creditcrunch

Andy

[border-rider]

No expert, but I guess you set up a firm deal to sell shares (you don't yet own) in a week's time at 15% under today's asking price.  That looks attractive, so loads of people agree to buy them, but you know guess that in 6 days time you can pick them up at 30% under and make 15% on the deal

[PaulF]

Well it's usually done using an instrument called a 'Contract for Difference' or CFD for short. CFDs may be bought or sold (shorted if you don't actually own them) in a similar way to shares but with some differences.

CFDs are linked to an underlying share so that rather than buying shares in say BT you buy a CFD. Instead of paying the full price of the share you put down a deposit with the broker that you're dealing with. When you come to sell, instead of receiving the full amount you will receive the difference between what you bought at and what you sold at. If it has gone down then you pay the broker the difference. The original deposit is the broker's insurance that, if the share does fall in value then your losses will be covered by the deposit.

Going short is the reverse, you will sell a CFD in anticipation of the price going down over time so that when you come to close your holding the broker will pay you money.

Does that make sense? There are other methods as well but are more complex and less tax efficient

[mrcharly-YHT]

There are Options as well. You buy the right to purchase the shares at a certain price in the future - or to sell them at a certain price in the future. That's right, on the derivatives market you can buy the right to sell shares that you don't own . . .  It's all flaming bonkers.

You can also 'borrow' shares, sell them, then you have to buy them back before the 'borrowing time' expires.

[rogerzilla]

No expert, but I guess you set up a firm deal to sell shares (you don't yet own) in a week's time at 15% under today's asking price.  That looks attractive, so loads of people agree to buy them, but you know guess that in 6 days time you can pick them up at 30% under and make 15% on the deal

You missed out "in the meantime, tell everyone that the company is about to issue a profit warning or has cashflow problems".

Never bet on anything that can talk!

[iakobski]

How does it work,  in simple terms...?  How do you sell stocks that you don't have?
http://www.guardian.co.uk/business/2008/apr/04/bearstearns.creditcrunch

Andy

While all the other answers are correct, they are about other financial instruments: options, derivatives, etc. Short selling has existed much longer than CFDs etc and is much simpler.

In "simple terms" as asked, a trader has a "balance book" of things¹ he trades in. Through the day he may buy some and sell some, but at the end of the day his book should balance, ie show zero. If he sells more than he buys, his balance will be negative or "short". This may²  be a problem, so the trader must "cover his position" by borrowing some of whatever he sold. Some days later, when the price has fallen (or not), he buys to bring his position back to zero and returns the stuff he borrowed.


Notes:
1. You can short anything that's traded: shares, bonds, currency, copper, sugar, etc. You can even short the options described above, and then it gets interesting.
2. Because you can close the trade but not actually deliver: suppose I sold you a tonne of copper I didn't have, by the time you come to collect it I might have bought some. However, you might come straight away, which is why I've arranged for another warehouse to lend me a tonne of copper if I need it.