simple question

Discussion in 'Strategy Development' started by will_jay, Mar 30, 2004.

  1. will_jay

    will_jay

    been looking at sum things, and i was wondering. if u start a trade by selling at low and then buying it back at a higher price.. wud u have had to own the stock before the trade, in order to sell first? just cause coming from a newbs perspective , it makes no sense lol.

    danke
     
  2. Dustin

    Dustin

  3. dgmodel

    dgmodel Guest

    WHAT~!?:confused:
     
  4. Ebo

    Ebo

    INVEST in a dictionary!
    Spellcheck may also help your trading.
     
  5. pspr

    pspr

    First you need to learn that you SELL HIGH and BUY BACK LOWER if you want to make money in a short trade.

     
  6. SumJurk

    SumJurk

    Yeah, a lot of people who don't trade much get confused with the concept of short selling.

    In your example, you would have sold stock you didn't own, but you would have to buy it back eventually. In your example, for a loss.

    When you sell a stock short, you want to buy it back at a lower price.
     
  7. This thread remembers me of memories years, and years and yeras back when I was trying to understand how a short worked. But even when I understood it, I noticed that it was difficult to explain to people who didn't know anything about stock trading (or even some that did some casual trading..ehhh... investing.. you know.. buy-and-hold).
    So I always use the following example: Imagine you are looking for a used car. And you tell me that you are prepared to spend 10k on a model XYZ. I, being well introduced into the car market , know that I can (probably) find that car for 8k somewhere. So I tell you: "ok, I sell you that car for 10k, and I deliver it in 2 weeks". So I sold you something I don't have yet. Then I go hunting for that model and when I find it , for 8k, I buy it and deliver it to you 2 weeks later. Profit for me : 2k.
    What's the difference with stock trading? Almost nothing. The only difference is, that in my car example , if I couldn't find it, I could say "Well, you know I had some trouble finding it blablabla", and could try to cancel the sale to you. With stock trading you HAVE to deliver the buyer. So if I promised the car, and I have made a mistake in my judgement and I can only find that particular model for 15k, I HAVE to deliver it to you for the agreed price (10k). Loss: 5k for me.

    Maybe the explanation is a little bit lengthy but I hope you understand better now how a short works and what it is.

    TFD
     
  8. Dustin

    Dustin

    I usually just tell people that your broker lends you the shares to sell in an automated transaction. Simple enough.
     
  9. danke: The concept of shorting freezes many peoples' minds for some reason.

    I am your broker. You come to me to make a trade. The instrument you want to trade just shot up 100 points and you feel certain the move is groundless and it will fall back quickly.

    You borrow the shares/units from me by selling them into the market (since you never owned them you must borrow them from me first then you can sell them).

    Sure enough as soon as you open the sell trade the price tumbles 90 points down. All that is your profit.

    You then "cover" that is, buy back the shares/units you sold then return them to me (since you borrowed them from me).

    You keep the profit less either my commission or spread.

    In stocks you can only short on an uptick. Not so in forex.

    Also, in stocks new rules make it to where you need a minimum amount of money in your account ($25K?) to actively short stocks. Again, not so with fx.


    Cheers!

    Sam
     
  10. On his profile he says he's a student -- and I believe he's
    just using a bit of texting/chatroom shorthand speak.

    This makes me assume he's a younger guy trying to learn
    something about trading -- which I think is perfectly
    respectable.

    JT
     
    #10     Mar 30, 2004