short selling, page-2

Dino: Found this some time ago, sums it up, refers mainly to the US market where most of our short interests are.

1/ "In short selling, the seller does NOT own the stock he is selling. That's why he borrows it. For example, Microsoft (MSFT) is currently selling at $28.50 per share and I don't own it. But I think it's going to go down in price so I decide to short sell it. On my trading platform I just choose 'sell short' rather than 'buy,' specify the number of shares I want to sell and hit the execute button. Behind the scenes, my brokerage allocates the shares for my short sale from their own holdings, or from the account of one of their customers (they don't know about it, and they are at no risk because of the short sale). Those shares are sold on the open market to someone who was looking to buy MSFT.

Let's say the stock does drop over the next few weeks to a price of $26. I decide to 'cover' my short position (which just means buying stock on the open market and returning it to whomever it was borrowed from. Again, my firm does this for me and it all happens nearly instantaneously). The stock price declined by 10%, so I made a 10% profit.

That's it in a nutshell.

2/ When you short a stock, you believe it is going to go down in value. The seller will be dealing with a broker and borrows the stock from someone else's account and sells it. If the stock goes down in price, the seller buys it back for the lower price and makes a profit. If it goes up the seller has to cover his position by buying it back at a higher price and shows a loss."