Short selling (also known as shorting or going short) refers to selling securities or other financial instruments that you do not currently own. Traders go short when they believe the price of a security will decline in the future.

A Simple Example

You believe that the price of HPQ, currently at 30, is too high and will decline in the future. You can initiate a short position in HPQ by selling its shares. (In real life, the shares you sell have to be borrowed; this is “implied” on Stockfuse.)

A few days later, HPQ’s share price declines to $25. You can then buy back the shares you’ve sold – this is called covering your short. Notice that you originally sold the shares for$30, but only have to pay $25 per share to buy them back. In the process, you’ve made a profit of$5 per share.

An In-Depth Example

Let’s assume that you currently have $1000 of cash and no open positions. You believe that the price of HPQ, currently at 30, is too high and will decline in the future. You can initiate a short position in HPQ, by selling say 20 shares of HPQ. After this transaction, you’d own $$-20$$ shares of HPQ whose market value is $$-20 \times 30 = -600$$, and your cash balance will rise to $$1000 + 20 \times 30 = 1600$$ – your cash balance rises because someone paid to buy these shares from you. Your total account value is now $$1600 - 600 = 1000$$. A few days later, HPQ’s share price declines to$25. You can then buy back the shares you’ve sold – this is called covering your short. Notice that you sold the shares for $30, but only have to pay$25 per share to buy them back. In the process, you’ve made a profit of $5 per share. Mathematically, your cash balance is now $$1600 - 25\times 20 = 1100$$ and you no longer have any open positions. Your total account value is therefore$1100 – you’ve made \$100 shorting HPQ!