What is Short Selling? Short Selling Stocks Explained

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Thanks for stopping by. This is a 2 Minute Classroom and today we are talking about short selling.

Investing and finance is not a usual topic for my channel but it's a relevant topic that many of you seemed interested in from my recent poll.

And to be clear I am not qualified to give financial advice so this is purely educational.

The traditional way to invest in the stock market is to buy a stock when it is low and sell when it is high.

Let's say you buy some Gamestop stock at $10 per share and after a few months, the price goes up to $15 per share. If you then sell your Gamestop stock you'll earn a profit of $5 per share.

Simple enough, right?

Well, short selling works pretty much the opposite.

A short seller looks for stocks they think will go down in price, not up.

When they identify a stock they want to short they borrow it from a broker and then turn and sell it on the market at face value.

The short seller has to return the borrowed stock to the broker at some point and pay the broker interest and a commission on the borrowed stock.

Once the stock price drops enough the short seller buys the stock from the market and returns it to the broker and pays interest and commissions.

Now let’s say a hedge fund or investment group thinks Gamestop stock will definitely go down and they want to short it.

They borrow the stock from a broker at $10 a share (plus interest and commission) and turn and sell the stock on the market.

If the stock then drops to $4 a share they can buy it back and return it to the broker, pocketing $6 per share minus interest and commission. A pretty solid payday.

If, however, the price goes up instead of down the short seller is still responsible to return the stock to the broker. So if the price jumps to $100 a share and the shares have to be returned, the short seller will lose $90 per share plus interest and commissions.

And that’s short selling.

If you’re interested in more finance videos like this one let me know in the comments and tell me what content you would like to see. I may throw it into a new channel.

In the meantime, here are some videos to save your butt in school.

Thanks for watching and I’ll catch you next time.

Видео What is Short Selling? Short Selling Stocks Explained канала 2 Minute Classroom