SELLING SHORT

Selling short is the opposite of buying low and selling high.  If you think a security's price will fall in the future, you can borrow shares from a brokerage, sell them, and, hopefully, buy them back at a lower price than you sold them for.  You then return the shares to the brokerage, making a profit on the difference.  Of course, if the share prices rise, you will have to buy them back at a higher price than you sold them for in order to pay back the brokerage, taking a loss.

Selling short is a way to profit from falling prices.  A short seller does not own the security before he or she sells it.  It is borrowed and then returned to close out the loan.

For example, you think that stock XYZ is overvalued.  You borrow 100 shares at $50 a share and then sell them for $5,000.  If you are lucky, the market drops on the stock and you buy the shares back at $25 a share and return them to your broker, paying a total of $2,500.  You have made $2,500.  If the stock rises to $100 a share, however, you have to pay $10,000 to get them back, and you have lost $5,000.

Investors can protect themselves from risk and make a profit through buying and selling options.  Let's examine options next.