how's it going today guys so I have to
say I'm really excited about this video
because it's something that I've always
had a decent understanding of but I've
never fully grasped the idea of short
selling stocks simply because I've never
done it I don't think I ever will but I
really wanted to talk about it because I
feel like there's so much confusion out
there as far as the theory behind short
selling a stock and my goal with this
video guys is I'm hoping that anybody
who watches this video by the time
you're done with it you could go explain
this to anyone I'm trying to make it as
simple as possible and where's that
going to lead I wish I could lay this
board out better because there are
certain things I wanted to add but I
just couldn't fit it on there and I
tried to work it a couple different ways
but this is like the best way I could do
it is like to have a pictorial diagram
here have some notes on my paper so I
really hope I'm delivering this in the
hope is guys is that by the time you're
done watching this video if you didn't
understand short selling before you
understand it now so make sure you guys
let me know at the end if I've achieved
that and if not I might even redo it
because I really want this to be like
the best video on shore selling as far
as the very basics of it and I'm
probably going to do a couple videos on
this because it's a very popular
investment topic and I've had a lot of
people ask me about it so I'm going to
do another video on like the main risks
of short selling but this is basically
just how it actually works in a very
simple way so if you're looking for a
more advanced video this is probably not
the video for you this would be like the
video if you don't even understand what
short selling is this is where you
should start so basically guys let's
start off by looking at a traditional
stock investment and how that basically
works so with the traditional investment
you have a company you have a stock
broker and then you have you or the
investor so basically the company is
going to offer shares to raise capital
and generally those are offered up and
they're traded on a stock exchange
through a stock broker and basically
your stock broker facilitates the buying
and selling of those shares and then you
as the investor you buy a piece of
ownership of the company through a
broker or direct
from the company now an example of this
would be if you're buying it through a
stock broker those are shares that are
traded on the stock exchange or if
there's no stock broker involved maybe
you have employee stock options and
you're able to get shares of a stock in
the company you work for without paying
Commission and without going through a
stock broker so that might be an example
of how you're getting shares directly
from the company if you're an employee
of that company but basically you buy
the shares or you buy the shares of your
company or you buy it on the exchange
and then you own the shares you own a
piece of that company and that is a
traditional stock investment that's
what's called a long stock investment
and when investors go long
you're basically anticipating a price
rise in the future it's what's called a
bullish investment you're betting on the
stock to go up in value and that's where
they get the name short from because
when you're long on a stock you're
betting on the price to go up and when
you're short on a stock you're betting
on the price to go down you're
anticipating a price decrease in the
future and that's a bearish investment
as compared to a bullish investment so
bearish investors make money from
falling stock prices bullish investors
make money from rising stock prices and
most traditional investing is a bullish
investment bearish is kind of a more
advanced investment many people will
disagree with that statement
but just from what I've seen and the
people I've talked to most advanced
people are doing short selling I'm not
saying that you as a beginner couldn't
short sell basically the principles are
the same you're just kind of doing it in
a different way but there's a lot more
risk associated with a short sale and
maybe at the end of the video you'll
understand why that is but I don't want
to get too deep I just kind of want to
get to the theory of this so anyways
that's a traditional stock investment
you're buying a piece of ownership of
the company either through a stock
broker or through the company directly
and then you're part owner of that
company you're betting on that stock to
go up in value you're bullish on that
investment now let's look at short
selling a stock there's a little more
going on with short selling stock and
basically what is a short selling what a
short song of stock well when you short
a stock you're basically betting against
that stock you're bearish on that stock
you're betting that price will go down
in the
future and short investors are bearish
and they make their money from falling
stock prices like I said a short sale is
the sale of a security that isn't owned
by the seller but it is promised to be
delivered so you're basically selling
borrowed shares and I'm going to explain
you guys exactly how that works in this
diagram here and it actually makes it
pretty simple we're going to go through
the steps so first of all step one is
the broker lends you shares and this is
an ax margin account so this can't be a
traditional trading account it has to be
a margin account in order to shore
itself
anyways the broker lends you shares you
essentially borrow the asset so here's
your stock broker you lend you these
assets and you become the short seller
okay so the stock comes from the
brokerage inventory or comes from a
customer or comes from another stock
brokerage so it's pet but they do have
to have those shares they at least need
to have those shares available to cover
but they need to have the availability
to get those shares where they need to
be holding those shares in their
inventory step number two is you sell
the borrowed shares on the market so
essentially right after you borrow these
assets from your stock broker you sell
them on the market to a buyer okay and
then the shares are sold to a buyer and
the proceeds are credited to your
account but at this point you never own
those shares you borrowed those shares
and because you did this in a margin
account you're now going to pay interest
until the short is covered and by cover
what we mean is to close the short by
buying back the shares and hopefully
buying them back at a higher but I'm
sorry at a lower price at a later date
so you've now basically borrowed the
shares from your broker sold them to the
market and now you're sitting there
paying interest on that margin account
until you buy back the shares and cover
that short so step number three is to
buy back the same number of shares from
the market at a later date hopefully at
a lower price and at that point once you
buy back dog shares from the market you
return those assets to the stock broker
who originally let you borrow them as
well as any interest that you've been
paying along so what the stock broker
gets out of this is interest they let
you borrow these shares in return for
interest what you get out of it is
a price difference between what you
borrow the shares for and then what you
bought them back for so let's look at
two examples here example number one
would be you're buying the shares number
two here so if you're basically armed
let me look here
you borrow the assets okay and to share
sell for $20 a share you sell the assets
for $20 a share okay
time goes by and then you essentially
buy the shares back from the market at
five dollars a share
well this fifteen dollars here in orange
that's all your profit because that's
the price difference between what you
sold the shares for and then what you
bought them back for now in a
not-so-good situation where you shorted
the stock and the stock went up in value
and you had to close your position or
basically cover your short that would be
where you bought your shares okay so
basically you've got your shares from
your broker sold them for $5 a share to
a buyer then the stock price went up and
then you had to cover your short and buy
them back from the market at $20 a share
meaning all this blue area here is how
much money you've lost now maybe you're
starting to see the big danger with
shorting a stock but we'll talk about
that in a little bit because there's a
few more things I want to mention with
this first of all after step two two
things can happen one of them is very
uncommon but it is something to
understand that this is something that
your broker can do once you're on the
wrong side of each you so what happens
after step two so after you sell the
borrowed shares and you're basically
just paying interest in your margin
account for the borrowed shares two
things can happen
number one is that you hold the short as
long as you want and just pay interest
because it's a margin account obviously
the longer that short is the more you're
paying an interest the second thing that
can happen is that investors can get
called away when the broker asks for
shares back or money to cover them as
well as any dividends while this is a
very uncommon scenario it has happened
in the past and it's very common when
there's many short positions on a stock
so it's possible that you could be
shorting a stock okay the value of the
stock goes up it goes against what you
expected and next thing you know you get
called away from your broker to
you either need to buy those shares or
come up with the money to pay for those
shares at the current market value and
that's where you can potentially lose a
ton of money so those are two things
that can happen after step 2 you either
hold the shares are basically you hold
the position and you pay interest or
there's a possibility that you'll get
called away and you have to basically
come up with the money or the shares at
that point and that's that's going to be
money from somewhere else either if you
have shares in your account that you can
liquidate or you're putting money into
your trading account so that's not a
good situation to be in for sure but
anyways next we're going to be going
over two scenarios of a good day short
position and then a bad day with a short
position all right now the last thing
we're going to look at here is short
selling on a good day and I'm short
selling on a bad day and let me just say
guys short selling in a good day that
could be a very good day for you I mean
what I'm saying a good day it takes
longer than a day and a day in most
cases but uh when you're having a good
time short selling versus having a bad
time would be a better way to describe
this but when you're having a good time
short selling let me tell you it can be
a great time there's a lot of money to
be made but when you're having a bad
time short selling it's a it's a bad
time in most cases so let's walk through
the numbers here just to get an example
of this so you're having a good time
short selling ABC stock is $100 a share
you believe that the stock is going to
go down so you have a short position of
1000 shares and in your margin account
that's 50% basically you have to have 50
percent of that so $50,000 invested
$50,000 on margin so that's how you have
your $100,000 you have $50,000 basically
on loan from your broker
so your total short position is $100,000
one year later ABC stock is now trading
at $10 a share you were right the
sheriff's just plummeted in value so you
basically now cover at $10,000 or
basically buy back 1,000 shares at $10 a
share and then you pay $2,500 in
interest basically 5% interest on a
margin account for one year and so your
profit would be $100,000 minus your
$10,000 covered - your $2,500 in
interest so your profit is eighty-seven
thousand dollars
$87,500 on a $50,000 investment you're
pretty happy with that investment that
is a great return
but let's look at what happens when
you're wrong and you short a position
and it goes against you so ABC stock
hundred dollars a share you short a
thousand shares and get one year later
though ABC stock is that $250 a share it
didn't go down in value it went up in
value and now all of a sudden your
broker decides to write a call order and
basically call on those shares and say
hey give me the money or give me the
shares at this point you buy back a
thousand shares at 250 a share for a
total cost of $250,000 you pay $2,500 in
interest so your profit is $100,000 -
$250,000 to cover - $2,500 in interest
so wait a second all of a sudden on a
$50,000 investment you lost 150 $2,500
that is the danger of shorting the stock
guys you your losses are infinite you
can lose an infinite amount of money if
this stock was 500 hours of share it
would be double that you know it'll be
300 thousand dollars plus the interest
you can lose an infinite amount of money
when shorting a stock and that is why
shorting can be very dangerous and you
really need to know what you're doing
while the gains can be wonderful and
fantastic you can you can make a ton of
money you can also lose an unthinkable
amount of money when you're shorting
stocks and I know these numbers probably
don't make sense but just for examples
sake I wanted to use them to show you
guys how much you could potentially lose
ideally somebody who was in a short
position like that they sure they would
have covered their position long before
that stock climbed to 250 so you know
it's all based on your strategy but it
just goes to show guys your losses are
infinite there's an infinite potential
to lose money when you're short sell a
stock and that's just what I wanted to
show you guys right here anyways guys
like I said this was a very basic video
on just the theory behind short selling
stocks and I'm planning on doing another
video probably a couple videos on short
selling when I'm is going to be what
risks are involved with shorts
on the stock because there's more than
one it's not just this infinite loss of
money I want to go through those other
risk factors involved that'll be another
video though I didn't want to drag this
thing out too long but if you guys
enjoyed this video please leave me a
comment if this was explained well
please let me know as well because if
not I would reconsider redoing it
because I really want this to be a great
video on short selling stock so make
sure you guys provide me with your
feedback if you have any ideas for
future videos about short selling stocks
or any of the topics that cover on this
channel drop me a comment as well I
would appreciate if you drop a like on
this video if you enjoyed it and if you
are new to the channel please subscribe
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as always I thank you guys for watching
this video
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