What exactly does it mean to "short".

I understand that shorting is something one does when they expect the market to go down. In other words, you are making a bet the market will go down and shorting will allow you to make money when that happens.

What I don't understand is technically, what a short IS. How does it work? Can you only do it with stocks? Can you do it with mutual or index funds? What does it mean to "cover" a short?

Excuse my noob question but this is the right forum...

the fundamentals are

sell a stock/ equity at 50.00 and buy it back at 40.00

to short the dollar you could buy the eur/ usd at 1.3070 and sell it at 1.3600

to short the euro you would sell the eur/ usd at say 1.3600 and buy it it back at 1.2600

and be very very very careful with this

Shorting is borrowing shares of a stock at the current price and selling them, then replacing them at a later date. The intent is buy the stocks cheaper when you have to return them than when you borrowed them, pocketing the difference minus a small premium to the person you borrowed the shares from.

@Jfe .... Great link...thanks!

FYI, a short may only be established in a margin account. You will be charged interest while a new short is established (as opposed to /may be/ charged interest while a new long settles). Further, you may be charged interest to HOLD the short, depending on the source of the borrowed shares. And, you may be forced to exit you short if the loaned shares are sold by the original buyer (the lender).

Can you do it with mutual or index funds?

Yes and no.

You can't short MFs. But there are many funds that move inverse to indexes. RYVNX for tech.
And two that are actively managed: bearx and grzzx.

Indexes: you can short directly the long ETFs like SPY or VTI, or you can buy inverse index ETFs like DOG, TZA, DUG etc.

In all these cases ... they are NOT buy and hold.

Pieter - what's the max time you might hold a position in a short ETF? Thanks.

Zeebo: If it's levered 2x or 3x, generally be out by the end of the day. Definitely not more than a couple days.

Unlevered (like spy) and time frames don't matter too much.

Thanks Asi!

Disagree with that. I have NO problem holding leveraged ETFs overnight or longer. In fact, my trading plan usually expects me to hold them 10-14 days or so.

I'd usually hold up to 2-3 weeks (as I would usually get stopped out by then at some point). But you'd better have a good timing system and use stops. Eg, I got topping signals around Nov 5,8-9 and they haven't reversed. So I'm still holding (some of) those shorts today.

I MIGHT buy them again late in Dec and hold for longer if we get a Dec rally that sets up my IT and LT charts properly for more than one swing.

But this wouldn't apply to gut or newbie traders.

Quote:

But you'd better have a good timing system and use stops.

Agreed, with your own disclaimer. :)