Investing 101: What is short selling (shorting)?

June 10, 3:42 PMBusiness and Finance 101 ExaminerAndy Samuels

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First of all, to understand short selling, two terms must be cleared up. When an investor goes long on an investment, it means that they believe the stock, for example, will rise in price over a period of time (people who buy stocks are going long on thier investment). The flip side of that is when an investor goes short on an investment, it means they believe that the stock, for example, will decrease in price over a period of time.

Short selling is when an investor who believes that a stock will depreciate in value borrows it and then sells it. It might seem confusing that someone could sell something they do not own, but bear with me.

Eventually, the investor who sold the stock short does have to buy it – this is called closing the short, and this is when the investor makes or loses money.

If the price dropped on the stock, like the investor thought it would, the investor can buy the stock at the new lower price. The positive difference between what they bought it at now and what they sold it at then becomes their profit. Conversely, if the price of the stock appreciates in value, the investor still has to buy the borrowed stock they sold at a higher price than what they sold it for, creating a loss.