When people buy stocks, they want the stock price to go up. This is called a “Long” position.

If you want the stock price to go down, you are taking a “Short” position.

So, when you are “shorting stocks”, you borrow stocks from your brokerage company, sell them at the current market price, and get the proceeds. Since you borrowed that stock, you have to give it back. If the price of that stock falls, you can buy that stock back at a cheaper price and give it to your brokerage firm.

Let me give you an example:

Couple of months ago, the shares of Citi Group (C) were selling for $5.00. Say, you got a feeling then that the stock price of C will go down and you shorted 1000 shares of C. You proceeds would have been $5000. Remember that you borrowed these shares and you have to buy them back from the market. Now, as of today, the stock price of C is $3.40. To buy 1000 shares, you have to pay $3400. Your total profit is $5000-$3400 = $1600.

Sir, you have just made some profit.

BUT…there is always a “BUT”. If the stock price had gone up, you would have lost money.

Facts about “Shorting Stocks”.

1. When you open a position, it is called “Short” position. When you close this position, it means to “cover” your position.

2. When you open an online trading account, you are generally not allowed to short stocks. You have to have a “Margin account” and the permission of your broker to short stocks.

3. Shorting stocks can be very risky because your potential loss is unlimited. When you short stocks, you are hoping the price will go down. What if the price goes up and goes up very high. Theoretically, it can go to infinity and beyond. To cover your short position, you may have to spend all your wealth.

I have a margin account at Zecco.com(aff.) and I can short stocks, if I want. It is just a useful tool to have, because you can make money if the stock market goes red.