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THE MARKET WHISPERER 24 1

How Do Shorts Work?

We execute a short on a stock that we think is about to drop.
Technically, when we buy a stock trending up, we hit the BUY button. A
short is no more complex to execute. In the trading platform, next to the
SELL button you will find the SHORT button. All you need to do to execute
a short is press it. You still don’t understand how to do it? Just press the
button: everything will work out fine.
Here’s an example from real life. When we execute a short, we are
selling a stock that we do not own for a high price, with the intention of
buying it later cheaply.

How can we sell a stock we do not own? Very simply. Here is a description
of a familiar situation: Let us say that you enter an exclusive furniture
shop and buy a sofa on special order, upholstered specifically to your taste.
Since this is a custom order, it is reasonable to assume the sofa is not in
the store’s warehouse, and you will only receive it once your wishes have
been carried out. Let us say that the shop assistant sells the sofa for $5000,
takes your money and promises delivery within several weeks. Once you
have left the store, the salesperson phones the manufacturer and orders
the sofa for less than what you paid: for example, $4000. Some weeks later,
the sofa is delivered as promised.

Does this sound like a common-enough situation? Note, however,
that in the first stage, the salesperson sells a sofa that the store does not
have for $5000, and only after you have left, the store actually buys it for
$4000, making a profit of $1000. In stock market terminology, the store
has executed a “short” sale: in other words, the sofa was first sold at a
high price, and only afterwards bought for a low price. The exact same
procedure holds for stocks as for sofas, cars or any item ordered which you
do not receive immediately on paying for it. The system works. So, how can
I sell stocks I do not own?