If you are an experienced investor shorting stocks should be part of your investment strategy. Shorting allows you to profit when a stock goes down in price. In a declining market, such as the current one, it is a lot easier to make money shorting stocks than buying stocks.

When you short a stock you are actually borrowing shares of a stock from your broker and selling the shares. You owe the shares you sold (shorted) to your broker so you have to buy them back and repay them (cover) at some point. If you are able to repay them (cover) at a lower price than you sold them (shorted) you make money. If you buy (cover) the shares at a higher price than you sold (shorted) the shares you lose money.

I tried to explain that as clearly as I could but I will also use a rough analogy that I have read elsewhere to help explain what shorting is. Let’s say your friend has a bike that is worth one hundred dollars. You know that the same bike is going to be on sale the next week for eighty dollars. Therefore, you decide to borrow the bike from your friend and sell the bike for one hundred dollars (you just shorted the bike). The next week, when the bike goes on sale, you buy the bike for eighty dollars and give it back to your friend (you just covered the bike). You make twenty dollars. That is roughly how shorting works. (more…)