Bearish Trades - Short Selling Explained
Short selling is the opposite of holding a stock for a long time. The short seller takes a fundamentally negative, or “bearish” stance, anticipating that the price of the shorted stock will fall. Sounds familiar?
So using options he loans money and buys a fixed number of shares, say 100 at $10. Agreeing to return those 100 shares back to the owner in x days. He then immediately sells for $1000. Since then the price drops to say $7 per share in a week, he proceeds to buys back those 100 shares this time for $700. He returns the share to the owner and pockets the difference.
This is a common practice done by day traders and hedge funds. The bad side is that it makes a market plummet at unbelievable speed, that is precisely why the US SEC has just temporarily banned it.
