Part 2/7:
Buying a stock is relatively straightforward. You have the necessary funds, place an order through your brokerage, and the stock is yours. In contrast, the short-selling process is more involved. When you short a stock, you first borrow the shares of that stock through your brokerage. You then sell those borrowed shares at the current market price. The proceeds from the sale are deposited into your account, creating what is known as an open short position.
To close this position, it’s essential to buy back the same number of shares and return them to the lender.
A Simple Illustration
Let’s break down the short-selling process with an example: Suppose you borrow one share priced at $10 and sell it. After the transaction, you have $10 in your margin account.