Anyone please explain to me Shorting a Stock?

I have an idea but not totally, what is the advantage for the person lending you the stock?  Thats what I don't get...

I'm pretty sure it goes like this. Let's say stock ABC is at $20, but you think it's over valued and the price is going to drop soon. You borrow 100 shares of stock ABC from a broker and you eventually have to return his shares when you don;t want them. You then borrow 100 shares of ABC at $20. Eventually stock ABC drops to $18.50 a share. Your not sure if it will go lower than this so you decide to give the borrowed shares back to the broker.

You borrowed 100 shares at $20. 100x$20= $2,000
You gave the broker back his 100 shares at $18.50.

Since the price has dropped $1.50. You take that $1.50 as profit for every share you borrowed. Which is 100x$1.50= $150.

So you made $150 profit. On the opposite side. If the stock went up to $21.50 a share. You would owe $150 when you gave the broke back his shares.

The advantage is if your prediction is right, you make money from the price of the stock dropping. If you used your own money instead of borrowing the shares, you would take a loss. Since you borrowed the shares and shorted the stock, you come out with a profit.

I think that's the basics. I never shorted stocks so I'm sure there's more to it. For instance I'm not sure if you can borrow shares for every stock. Read around more and learn everything before you try it.

Oh and also I use scottrade. I'm not sure how it works on wall street, but if you want to short stocks online you need a margin account.

 

From where? or what website do you recommend

In finance, short selling (also known as shorting or going short) is the practice of selling assets, usually securities, that have been borrowed from a third party (usually a broker) with the intention of buying identical assets back at a later date to return to that third party.

Roonie - That's a good question.  The advantage for a broker loaning you the stock are the fees they'd generate from executing your trade and the small interesting they charge for this stock loan. 

ACK - *interest ... NOT interesting ... apologies

K so how can I get started?

You will need to open a margin account with one of the online brokers.  Remember, not all stocks are available to be shorted.   Many a time I went to short a short and got a message telling me no shares were available to be brrowed and shorted.

The person "lending you the stock" isn't even aware that it is being "borrowed" and shorted.  Your stock is in the name of your broker unless you request certs.

Shorting a stock is an advanced strategy, I am not sure you are really prepared to do so.

short: GMCR

short: BAC

shorting is advanced trading, if you need to ask how it works, u are too inexperienced a trader and shouldn't do this, its a lot harder than it sounds