Shorting

[MichaelR]

Can someone with experience in shorting explain in logic how to make money shorting a share?

[WR]

sell what you dont own and then buy it back at a lower price.. read under Help and education on SSF's

[JDT]

Pretty much the same as going long... buy, then sell at a higher price. You're just doing it in reverse by first selling.

[#4]

Shorting can be done via Futures, which basically mean you "sign" a contract to buy/sell shares at a future price, not the current one. You decide then if you think the share price will be more or will it be less in the future. It's based on SAFEX, which is futures for maize, sunflowers, etc. Say for instance you are a farmer, and you want to plant some maize. You do your budget on the current maize price, but you are afraid that the maize price will be too low when you harvest your maize in say 6months time. So then you go to an institution and you sign a contract to deliver say 100tons of maize in 6months time, but you sign the contract on the current maize price, for example R1800 per ton. So you are basically selling maize you do not own. When 6 months pass, you have to deliver 100tons of maize. Should something then have prevented you from harvesting 100tons, and you are short by say 20 tons, you have to go and buy 20 tons at the current maize price then, which could be for instance R2200 per ton. You will then lose R400 per ton, because you signed a contract to deliver 100tons of maize at R1800. Should the maize price at time of delivery be R1500, you would still get your R1800, because you have a signed contract. Say for instance the farmer did not harvest any maize, and the price is R1500 per ton when the contract expires after 6 months, he can then go and buy 100 tons of maize at R1500, and sell it at R1800, making a profit of R300 per ton. You can apply the same principle to shares. If you think a certain share is going to drop in 2 months time, you can take a contract to sell for instance 100 Billiton shares at R200 per share. You do not own these shares, but in 2months time, if the share is R180, you can buy 100 shares at R180, and sell it at R200, making a R20 profit. That is called shorting. If you think a share will climb, you can buy for instance 100 shares at R200, and sell them in 2 months time at R240, should the share climb. The only difference between shares and maize is, that you do not have to wait for the contract to expire, you can get out at any time. So if you think a share will fall tomorrow, you can short (sell) it today, and buy it back tomorrow at a lower price, and take your profit.

[dookie]

I think of it like this. You figure BIL is going down. Standard Bank lends you some BIL shares - they keep lots and lots of shares in cold storage for this purpose... But instead of giving them to you they sell them on the market for you eg @ R100ea. So tomorrow, indeed BIL has gone down to, say R90. You tell Standard you want to exit the deal. They buy on the market, the shares they sold yesterday(lent you and sold for you) and have to pay the market R90 ea. They take back their shares and give you R100 they got for selling - R90 they had to pay to buy them back = R10. (Less a little commission of course). Ingenious. Beats work hands down.

[Sugar_Snap]

Nicely done, this is always a difficult one to explain.