Shorting Stocks

Stock shorting can be illustrated through very concrete examples. Say stock "shambles" breaks out of the resistance at $23 and is currently trading at $18. Using your instincts and your experience with analyzing the stock market trends, you reach the conclusion that this decline would continue. So you decide to borrow 100 of the "shambles" stock from a broker and then go forth with selling them. But you do sign a contract with your broker stating a date on which you would need to return those stocks.

So now you go about selling the stocks at $18 and you have made $1,800. In the coming months, the price for the "shambles" stock has gone down to about $8. So you buy 100 shares from the market for about $800 and then return them to your broker. Just like that you've earned $1,000 in such a short span of time without having to take out and spend a single penny from your own pocket. That, ladies and gentlemen is what we refer to as shorting or short selling.

A good example of shorting practiced in real life is that of Northern Rock, a UK bank whose stocks were priced at £12 in February of 2007 and then it plummeted to £2 by the time September came rolling in. Just imagine the profits of those who were smart enough and foresaw this decline. Those who went for shorting the stock made about £1 billion which is about $2 billion in US dollars in just a span of a few months. This may have been a rare case but it does demonstrate just how much can be gained from shorting if you play your field right and with a little bit of luck on your side.