I started a couple months ago to learn more about the stock market and financial education in general, but this particular concept was hard to wrap my head around.

I understand there are bears and bulls behaviors in the stock market, but when I go and sell a stock, how can I sell it if I don't own any of that stock already?

I can understand if I go around the block, find someone selling shoes for 10$, I buy them, then I go two blocks down the street and find someone wanting shoes for 12$, I can make a profit by Selling to him.

But if I reach the guy that wants shoes, how can I "Sell" something I don't own yet?

  • So, basically when you sell you also borrow the thing you are selling, it just happens fast because all stocks are in high numbers and digitized, and are considered equivalent. – Loop Aug 8 '18 at 10:02

But if I reach the guy that wants shoes, how can I "Sell" something I don't own yet?

Going with your scenario, you borrow the shoes from someone and sell them to the "guy who wants the shoes". But you owe that exact pair of shoes to the person who loaned them to you.

Short selling is the sale of a security not owned by the seller. If available, your broker borrows them from someone who owns the stock. In simple numbers, this effectively creates two owners of the same 100 shares (+100 and +100) with the short seller having the opposite obligation ( -100) which nets out to the original +100 shares owned if no shorting was involved.

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  • this isn't exactly true, in reality you actually owe the exact stock (or other instrument) or an acceptable alternative. I know this is nit picking but it can be extremely important with corporate actions that mean that a stock no longer even exists. – MD-Tech Aug 3 '18 at 12:53
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    I don't follow the nit pick. If I borrow 100 shares of IBM from you to short, I owe you 100 shares of IBM. Also, if I borrow those shares, I can't promise to return an acceptable alternative (U.S.). It's shares borrowed, shares returned. As stated, "But you owe that exact pair of shoes to the person who loaned them to you." – Bob Baerker Aug 3 '18 at 13:01
  • this is more common in fixed income actually where the exact bond series might no longer be available. A (made up) example is if I borrow IBM series A 2020 bonds to sell short and IBM buys them all back I can't buy the same IBM bonds but I can buy IBM bonds with the same yield and maturity from another series which are effectively the same. – MD-Tech Aug 3 '18 at 13:06
  • Also if (due to a merger for example) IBM changes its name to "Apple2" [silly intentionally] I can't buy back IBM shares because they don't exist but I can buy the equivalent Apple2 shares. What constitutes an acceptable alternative will be listed in the loan agreement. – MD-Tech Aug 3 '18 at 13:08
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    Alternative instrument? OK, I get it now. This is a lot of hair splitting. If you borrow 100 shares of IBM to short, a corporate event occurs and the 100 shares shares turns into something else (stock split, cash and or stock merger/takeover, convertible bonds, etc. etc. etc.), then you owe the "something else" to the lender. Isn't that kind of obvious? This entire tangent is much ado about nothing. – Bob Baerker Aug 3 '18 at 13:57

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