Most investors and history shows us that when we buy a stock it generally goes up thus earning a profit when we sell it high. However, if you are betting that a stock is going to go down after buying it, you short it.
Say you buy 100 shares of stock at $10.00 a share from your Broker, (like eTrade) that is going to cost you $1,000.00. As time goes on you think the price is going to fall. You buy 100 shares at $8.00 a share = $800 and return them to your broker and make $200 in profit.
Another example is you buy 100 shares of stock at $25.00 a share from your Broker that is going to cost you $2,500. As time goes on you think the price is going to fall to $20.00 a share, so you short it. You buy another 100 shares and borrow from your Broker which costs you $2,000. You return them to your broker and make $500 in profit.
Shorting stocks involve borrowing money (from your Broker). Keep in mind that you are using your investment in the brokerage firm as collateral. (You must meet the minimum maintenance requirement of 25%) in your account and if your account slips below this then you will be forced to cough up more cash or liquidate your position (sell your stocks for a loss).
Shorting a stock can be risky, as your losses can be infinite, whereas if you buy a stock expecting it to go up, you can never lose more than your initial investment. Also, if a stock shows that the direction is generally upward then keeping a short position open for a long period of time can become risky.
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