How to Explain Short Selling to Your Mother

Occasionally, at a social function or while scrounging through a dumpster in back of Arby’s, I’m asked the question “What do you do for a living?”

Sometimes I’ll just say that I work in an ice cream shop or huck a handful of soggy curly fries at them.  But if pressed, I will cop to the fact that my work is related to the stock market.

This revelation usually prompts looks ranging from excitement to Schadenfreude, depending of course on what phase the market is currently in.  If it happens to be in a downtrend they’ll usually give me a pitying look, saying something like “wow, things must be pretty tough, huh?”  I, of course, respond that I am doing fine because you can make money when stocks move down.

(insert glazed look in conversationalist’s eyes).

My mother actually thinks I’m describing something illegal when I tell her money can be made by shorting a stock. She’s convinced that it must be some evil endeavor created by a Satan/Hitler/Beiber-type troika.  Personally, I’ve never had an issue with the concept of shorting, which is probably why I’ve traded for over 30 years.  But for others who don’t quite understand the concept, I’ve developed a simple way to explain it.  It goes like this;

A share of stock is a standardized instrument just like a book or a DVD, meaning every share of Apple is the same as every other share of Apple, just like every DVD of Harry Potter and the Deathly Hallows is the same as every other.

So let’s say your best friend just bought a brand new copy of Harry Potter and brings it over to show you.  The first thing you should do is ask yourself is why you have a 13yr old as your best friend, but after that, let’s say you immediately ask to borrow the DVD before it’s even unwrapped.

At some point you will have to return it to your friend — I mean, not really since you can probably beat up a 13yr old — but assuming you’re a decent person you’ll eventually give it back.

Now, let’s say that you take the copy you borrowed and sell it.  Maybe you sell it on Ebay, maybe at a garage sale, maybe to an individual, it doesn’t matter where, but you get $25.00 when you do. However, you still owe your friend one copy of Harry Potter, so you order a copy on-line from a discount DVD liquidator that only costs you $19.95.

When the DVD arrives you return it to your friend, keeping the difference between what you sold it for ($25.00), and what you bought it back for ($19.95).  Thus you’ve made money by selling something you did not own and then buying it back (and replacing it) for less that you sold it for.

Short selling is the same concept; you just replace a share of stock in XYZ company for the copy of the Harry Potter DVD.

In the above example, the venue where you sell the DVD could be anywhere, but with stocks, it’s the open market.  If you were unable to buy the DVD back for the $25.00 or less that you sold it for you would have had to cover the difference out of your own pocket making it a money-losing trade.  Or you could just tell your friend you lost the DVD and say “what the fuck you gonna do about it punk?”

The same concept applies for the stock market example as well (minus the “punk” part).

  • reggeee

    Who is lending you their stocks to sell?

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  • In your example, you made a profit when the price went up to $25 when you sold it. But what happen if you can only sell it for $15? So you need the price to go up first to make a profit.

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  • Youreawizardharry!

    So my mom asked “why would a complete stranger loan you a copy of her book over the Internet?” And I [stupidly] said “I have no idea but I’m willing to bet it has something to with greed or fear.” Her look of disdain made me feel that this analogy is lacking a motive, which would be helpful in repairing my mothers opinion of my day time activities. Why do people offer their shares for borrow?

    • That’s a really good question, except I believe it’s not individuals who do it. I imagine brokers get some liquidity kickback or just want to make more options available to create more commissionable transactions.

      If you find out, drop me a line and let me know.

  • Blue Diamond

    I never post on blogs but I had to as I was laughing when I saw this. My husband just told my mother-in law I was day trading. She didn’t understand at all. She asked if it scared him. Yet as they say the proof is in the pudding. He finally ended the conversation with mom she makes more then I do most days. ( He is a professional scientist). Thank you so much for this post… now at least I have a plan for the inevitable shakedown over the holidays. I never thought of using an analogy. I just wanted to post something for new traders, however. I practiced for five years while in college before trading with real money. It is important to do so when you actually start trading emotion is not in play. Start trading (when your successful) and when you start thinking about the trades and the market each night, not the money.

    • You should get on StockTwits and share your experiences. We need more lady traders 🙂

      Thanks for reading.

  • Manto

    When you sell short must you set a date when the stock (book) has to be repurchased or can you buy back the stock at your choosing??
    Man

    • No date, buy back (cover) when you wish.

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  • RO

    Isn’t naked shorting more like advertizing the book for sale, selling it, then trying to buy it for less? No need for the friend to buy it … the bookstore will lend it to you if need be.

    If you can’t immediately get the book for less, then just wait until you can. Remember, the folks to whom you sold the book don’t really want delivery, just the promise.

    And because you don’t have to put up much, if any, real money, just the promise, you might have dozens of copies ‘sold’ (short) pocketing the profits.

    Of course, if you did this with clothing you might be sued for fraud, false advertizing, etc.

    Is that why you don’t naked short?

    • Nils

      You don’t naked short because your mother might think you are a pervert.

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  • I never gamble….it’s like trading!

    Thanks for reading Judy.

  • Judy G

    A friend asked “How are you doing in the market?” I responded “I’ve made some money on the short side”
    His answer: I never do that… it’s like gambling.
    Duh.

  • A car could be standardized too.

    Like a black 68′ Charger for a black 68′ Charger.

    Thanks for reading.

  • I do the same thing only with cars. I like the idea of making it standard though, like harry potter book.