Short selling is simply how you bet on the decline in value.
1/ Short Selling 101
With the markets continuing to rally, there has been more talk of “shorting” or “short selling” stocks.
But what does that mean and how does it work?
Here’s a quick educational primer: Short Selling 101
Short selling is simply how you bet on the decline in value.
You believe this will lead to a huge coffee harvest, flooding the market with coffee and driving down the price. You want to profit from this.
So you borrow a bag of coffee from Jimmy, your neighbor.
You now have $20 but you owe Jimmy a bag of coffee (you borrowed it, after all).
One month later, the price of coffee drops 50%. You buy a bag at the local store for $10.
So you sold a borrowed bag for $20 and then bought it back and returned it for $11 ($10 plus $1 interest).
You’ve made $9 profit on your coffee “short” position!