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RVB's Market Musings

What began here as an avenue to interact and learn has far exceeded those goals.

If you are a prospective employer, please consider this site a place where you can see my passion for investing...

Tuesday, May 10, 2005

LEARN: What is selling short?

There are zillions of places you can find info out there on this. The concept is simple. You borrow something (stock), and actually sell it. Then, later on, you buy a replacement (stock), and give that replacement back to the person you borrowed it from.

So imagine this scenario: You borrow your friend's coffee maker, because it's just sitting there anyways. He won't even know it's gone. Then you sell it. A week or two later (or whatever timeframe you choose) you go to Wal-Mart and buy a new coffee maker, exactly like the one you borrowed. Then, you go put it back. That's basically what short selling is.

This is a strategy that attempts to profit from a fall in a stock's price. It can be very risky, depending on how much attention one pays to the position. This is because the lowest price a stock can have is zero. The highest price is infinity, therefore, there is no maximum loss. For more: Investopedia's definition of short selling. There are many things to consider when attempting to short a stock, which is why this is considered an advanced tactic.


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