Looking for an answer on stock shorts

[Mr. Mojo]

OK I am not an investor, but at one time had a mutual fund,luckily I sold out before 2007. What I don't understand is how can someone "short" a stock? Where does the values come from? When someone buys a stock and it goes up in value, then demand will clearly require a higher value for the stock. When you buy a short on a stock, where does the value come from if the firm you are shorting does what you want? Who pays you for your short on the stock, and how is the value computed? Is there a parallel financial universe that I have missed out on understanding?

Thanks

 

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[treasurekidd]

To short a stock, you find a stock that you think is grossly overpriced, borrow shares from your broker and sell them at current price. When the share price falls, you them buy them back at the lower price and return them to your broker, and pocket the difference.

Example using actual prices: Back on October 30th you borrowed 100 shares of Citicorp from your broker and sold it at the market price of $13.11 and hold the $1,311.00. Since then, Citicorp stock has tumbled, closing today at $3.11, so today you buy up 100 shares at $3.11, and returned them to your broker to complete the short, and you pocket the $1,000.00 difference.

This is an example of a successfull short sale. The risk, of course, is in the price not falling or even going up, in which case you owe. There are time limits involved in shorting as well. Please check out the link I added below for more info on shorting. Good luck!

http://beginnersinvest.about.com/cs/newinvestors/a/022703a.htm

 

[seger98]

To short a stock, you find a stock that you think is grossly overpriced, borrow shares from your broker and sell them at current price. When the share price falls, you them buy them back at the lower price and return them to your broker, and pocket the difference.

Example using actual prices: Back on October 30th you borrowed 100 shares of Citicorp from your broker and sold it at the market price of $13.11 and pocketed $1,311.00. Since then, Citicorp stock has tumbled, closing today at $3.11, so today you buy up 100 shares at $3.11, and returned them to your broker to complete the short, and you pocket the $1,000.00 difference.

This is an example of a successfull short sale. The risk, of course, is in the price not falling or even going up, in which case you owe. There are time limits involved in shorting as well. Please check out the link I added below for more info on shorting. Good luck!

http://beginnersinvest.about.com/cs/newinvestors/a/022703a.htm

You've said it perfectly!