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I am fairly new to trading and have been practising on demo and practise accounts. I feel confident enough to open a live account and start trading. But the idea of Selling still confuses me .

From what I understand and that isn't much btw …. Selling is quite literally the opposite to buying. Wher ein buying (in a perfect scenario) you would buy when the stock or etc: is at its lowest point. With Selling it is best to get or sell when its at its highest point.

But I do not understand how you can sell without having ownership first

This image was of a training account where I was just testing and practising

Its just baffling to me for some reason and I was hoping someone could explain how it works.

Thanks for any help and sorry if I got anything wrong.

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    But I do not understand how you can sell without having ownership first. Is your question about shorting a security? – Bob Baerker Apr 3 at 21:25
  • yes thanks i don't know why im getting baffled by this – Hamza Arshad Apr 3 at 21:34
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    See if this makes sense: investopedia.com/terms/s/shortselling.asp – Bob Baerker Apr 3 at 21:42
  • @BobBaerker This was helpful thankyou – Hamza Arshad Apr 4 at 12:16
  • You're welcome. When shorting, one should be cognizant of the borrow cost and the ex-dividend date (shorters pay the dividend to the share lender if short on the ex-div date). But of paramount importance is that one should never short anything until one is an experienced trader that practices disciplined risk management. In normal times, buying put options makes more sense for the noob (limited risk) but since these are not normal times, option premium is sky high and that's more quicksand – Bob Baerker Apr 4 at 12:23
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Lets talk about cars!

So you really really like cars. You buy limited edition cars because you know that they would go up in value. However, you somehow figure out that a particular limited edition car - The Potemkin 500 - which is currently a very expensive hot-seller is actually a Toyota Camry that has been dressed up to look like a very futuristic expensive electric negative-emissions car. Potemkin 500's sell for $1,000,000 a piece, but you know that this ruse can't go on for much longer and you want to profit from it.

So what do you do Hamza? You go to your neighborhood limited edition car dealer (you must live in a very wealthy neighborhood) and ask to borrow one brand new Potemkin 500 for a rental fee of $1,000 per month. These Potemkins are looking cars, not driving cars i.e. the type you exhibit in your in-house car gallery (boy, you've done really well for yourself Hamza...an in-house car gallery?!?).

However, instead of giving it a spot in your gallery, you sell it to some unlucky guy right there in the dealers parking lot for $1,000,000. Now, we're going to deviate a bit from your typical rental agreement and assume you can return ANY brand new Potemkin 500, they're all the same color anyways. (Fungibility is sort of needed to make this work)

A month later Car & Driver magazine runs an expose on how these Potemkin 500's are just dressed up Toyota Corollas (not even Camry's like you thought). Prices come tumbling down and instead of selling for $1,000,000 dealers and owners are begging people to take them for $50,000 which I guess is the right price for a really nice looking Corolla.

What do you do next Hamza? (you wicked smart trader, you!) You buy a brand new Potemkin 500 (now aka limited edition pretty Corolla) for $50,000 and take it to the dealer. In summary, you borrowed it, sold it for $1,000,000, bought it back for $50,000 and returned it, making a gross profit of $950,000, but then you paid one month's rental fee of $1,000 leaving you with a net profit of $949,000 (man, i want to be like you when I grow up!)

PS:

Your brokerage company is the dealer, Potemkin 500s are whatever stock/company you think is over-valued and going to drop in price, the rental fee is the interest the brokerage company charges you.

Now, with short selling, the most you can make is the price at which you sell the stock. For example, your best case scenario with the Potemkin 500 would have been for it to be worthless. In that event, you'd have walked to a trash dump somewhere, picked out a brand new one and returned it keeping the entire $1,000,000 (less any rental fees). You would not have been able to make more than that (unless you consider negative pricing which doesn't apply to equities but does with some other asset classes).

Your worst case scenario would have been infinite loss, bankrupcy and the end of Hamza's Smart Trading Enterprises. That would happen if you were wrong and instead of being dressed up Toyotas, Potemkin 500s turned out to have a chassis made of Vibranium, that rare Wakandan material. Car & Driver runs an expose on this and a week later they're selling for $10 million, then $1 billion the week after. (Summary: short-selling stocks - infinite loss, limited profit)

On the other hand that Limitado 725 in your in-house car gallery which you bought for $500,000 could return infinite profit if it turned out to be the car made of Vibranium, but your loss would be limited to the $500,000 you paid if it were the dressed up Toyota Camry. (Summary: buying stocks - limited loss, infinite profit)

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