Q7: What is short sell? How to short a stock?

A: "Short sell" is selling something you do not already have. In borrowing stock from your broker and selling it on the market, your account will be accredited the proceeds, reflecting that you are "short" (you owe) the stock. Eventually you will have to buy the stock back to "cover" your short position, returning the stock to its owner, your broker, either making or losing money from such a short sell trade. For example, assume at this moment, the market price of IBM is $120. You believe that it will soon drop to $110. You can short sell 100 shares of IBM at $120, so that your account will be accredited $12,000 and earn interest on it. Three days later, if IBM drops to $110, you can buy 100 shares back from the market by debiting $11,000 from your account, returning the shares to your broker and thus making a profit of $1,000. On the other hand, if IBM's price goes up to $130, you'll have to buy 100 shares at $13,000 to cover your short position, losing $1,000.

Though it sounds complicated, the actual procedure for short-selling a stock is just as simple as that for buying a stock. You need only to open a margin account with a brokerage house and instruct you broker, either electronically or by phone, that you want to short a stock. At the time you want to cover your short position, you can just buy the stock in the way you always do.