What is short-selling?
Updated on 18 September 2008
The short sellers are thought to have made millions if not billions from the collapse of Lehmans and HBOS. So how does it work?
Short-selling: a definition
The idiot's guide to short-selling works something like this:
If I'm the short-seller, for a fee I would borrow shares from the share holder and promise to return them. I can then sell the borrowed shares on the market for, say, £10 a share.
I'm betting that the shares will have dropped and, lucky me, they have to £5. I can then buy them back at the cheaper price.
I give those shares back to the share holder but I've made a healthy £5 profit on each share.
Naked short-selling isn't as exciting as it sounds - it just means I don't even bother to borrow the shares.
