Taking a 'long' position when investing is simple - you buy something (e.g a stock) with the hope it will appreciate in value, meaning you can then sell it and make a profit.
However, the reverse, going 'short' involves borrowing stock which you then sell, hoping it will depreciate in value, meaning you can then buy the same amount back again to give back to your lender and pocket the difference (your profit).
Now, what I'm struggling to understand is why the short selling concept must involve borrowing, whereas the long approach involves just dealing with your own stocks. Is it just because it would be pointless to try and short sell your own stocks as you wouldn't benefit from it?
Take a simple example of 'going short' but using your own shares:
- ACME Corp is valued @ £2.00 per share
- I purchase 10 shares @ £2.00 each, making my balance -£20.00
- Then ACME Corp has some unexpected bad news, meaning its share price is likely to drop
- It starts dropping, so I sell up (go short). I sell my 10 shares @ £1.50 each, making my balance -£5.00
- The share price then hits what I think is rock bottom at £1.00 each, so I decide to buy them back. I buy 10 shares back at £1.00 each, making my final balance -£15.00
When you first look at the above, you think "I've made £5 out of the share price dropping", but...If I'd have just cut my losses and sold my shares once they started to drop, my balance would have been better at the end. Say for example if I just stopped after I'd sold at £1.50 each, my balance would still be -£5.00, which is better than the -£15.00 in the above example where I'm 'short selling' my own shares.
I'm sure this question has a very obvious answer, but I'm not confident that I have it worked out.
A simple way to ask the question might be to say "why can't I just use the same trick with my own shares to make money on the way down? Why is borrowing someone else's shares necessary to make the concept a viable one? Why isn't it just the inverse of 'going long'?"