Short Selling
What is short selling?
Short selling is a useful technique that many beginning investors do not know about. In essence, it is the opposite of buying a stock in everyday trading. An investor sells shares of a stock that he does not own, in the expectation that the stock price will fall and he can actually buy the shares at a lower price. In essence, instead of buying a stock and hoping the price will increase, the investor sells shares and hopes the price will decrease.
How long can you hold the short sell?
Since you are selling borrowed shares that you do not own, you will eventually need to pay them back. In normal circumstances, you can indefinitely hold the sale, but if the broker wants the shares back you may be forced to buy them at the present price. Also, during the period that you have possession of the stock, since it is actually owned by somebody else you have to pay the dividends to that person.
Why would you short?
You can short for essentially one of two reasons. You might want to speculate against a certain stock. For example, if you decided to bet again Enron before its fall, you would have made a lot of money. Also, you could short to hedge a bet and even out your portfolio. For example, you might buy shares of Target and short shares of Wal-Mart to ensure that you won't gain or lose too much money. However, shorting to hedge is only generally done by very knowledgable institutional investors, and as a small private investor you shouldn't worry about it.
Picture from Wikipedia, May 2006