How To Really Ruin Your Financial Life and Portfolio

Chapter 14Sell Short

One of the great glories of our stock, commodities, and certain other markets is being able to make money by wagering that a stock or a commodity (or something else too exotic to think of right now) will go down. Yes, you can make money by selling short a stock or virtually anything else.

Here, in a simplified way, is how it works.

You go to your broker. You tell her you want to sell your stock in that new social media site short because you have a feeling in your fingertips that it’s going down.

So, let’s say you want to sell 1,000 shares short when the stock is trading at $15 per share. The broker “borrows” 1,000 shares of the stock from my account or someone else’s account and sells it at $15, for a total proceeds of $15,000 (less fees).

That $15,000 appears as both a credit and a liability on your books. Yes, you have the $15,000. But you also have the legal obligation to repay the 1,000 shares to the other client’s account within a set time. In the meantime, you pay interest to the broker for the borrowing of the stock.

Suppose your brilliant intuition about the stock is correct and it goes down to $5 per share. You then tell your broker to buy 1,000 shares for you. You buy the shares for a total of $5,000. You return the shares to their original owner (who probably had no idea they were gone in the first place). You have a profit of $10,000—the $15,000 you originally got for selling the stock you borrowed less the $5,000 you paid to replace it. Pretty ...