What you explained is a put option. Short selling is very different than buying a put option (although both investors are hoping the stock decreases in value)
Firstly, options trading is not for entry level investors. Maybe covered call options are OK for certain "non-sophisticated" investors under the right circumstances.
Likewise short-selling is not for the uninitiated, faint-of-heart or the thinly capitalized investor.
Short selling is selling a stock that you don't own. So if you sell 100 shares (that you don't own) at $100 you get $10,000 from the sale. If the stock goes to $89 and you buy 100 shares to cover your short position you have a profit of $1100 (less brokerage commissions). If the stock only goes to $95 and you buy 100 shares to cover your short, you make $500. However, if the stock price increases to $101 your broker will require you to have additional stock holdings (or cash) to provide sufficient margin for the short position at $101. You must always maintain sufficient margin at your broker with other stock holdings or cash so that if the broker needs to cover your position he can. Theoretically, your short sale has an unlimited downside if the stock continues to increase in value. Many short-selling novices have been "whipped" by an unexpected surge in the stock price and found that their broker covered their position because they did not have sufficient margin in the account at the time.
What you explained is a put option. Short selling is very different than buying a put option (although both investors are hoping the stock decreases in value)
Firstly, options trading is not for entry level investors. Maybe covered call options are OK for certain "non-sophisticated" investors under the right circumstances.
Likewise short-selling is not for the uninitiated, faint-of-heart or the thinly capitalized investor.
Short selling is selling a stock that you don't own. So if you sell 100 shares (that you don't own) at $100 you get $10,000 from the sale. If the stock goes to $89 and you buy 100 shares to cover your short position you have a profit of $1100 (less brokerage commissions). If the stock only goes to $95 and you buy 100 shares to cover your short, you make $500. However, if the stock price increases to $101 your broker will require you to have additional stock holdings (or cash) to provide sufficient margin for the short position at $101. You must always maintain sufficient margin at your broker with other stock holdings or cash so that if the broker needs to cover your position he can. Theoretically, your short sale has an unlimited downside if the stock continues to increase in value. Many short-selling novices have been "whipped" by an unexpected surge in the stock price and found that their broker covered their position because they did not have sufficient margin in the account at the time.