How To Sell A Stock You Don't Own

How do you sell a stock you do not own? First you borrow the stock from a third party (your broker) and sell it to someone else. Later, when the share price drops you buy it at a lower price and return to your broker, thus making a profit. This is known as short selling.

Short selling (also known as going short or shorting) is the practice of selling stocks that have been borrowed from a broker, with the intention of buying them back at a later date. The costs of shorting may include the fees paid to borrow stocks as well as payment of any dividends paid on the borrowed stocks.

There are many reasons you may want to going short, some of which include:
- The company loses its way to achieving future growth.
- Stock market is in a downward trend.
- Lowered future earnings guidance.
- Shareholder dilution.

Example of short-selling:
You decide that stock of Company ABC is about to drop in price soon so you want to short the stock. First you borrow the stock you don't own from your broker, let say, 800 shares at the current trading price of $3 per share, and sell them to someone else for a total of $2,400 (800 * $3). Subsequently, the price of the shares drops to $2.20, you then buy them back for $1,760 (800 * $2.20) and return to your broker. In this case, you make a profit of $640 (2,400 - 1,760), before deducting any trading fees.

* Next: Knowing When to Sell Your Stock
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