Dear Mr. Berko: Can you please explain, in simple English, what a short sale is, how it works and how it's possible to make money.
My broker tried to explain this to me, but he's too technical and I get lost in his explanation.
He wants me to short one of several stocks that he believes will fall in price this coming winter or spring.
I want to understand this and hope you could you simplify the answer for me.
I know it's risky, but I can handle the risks and it would be fun.
I'm a well-paid commercial artist, and while I'm considered a creative talent, I seem to have little talent for understanding this financial concept.
The broker wants to short-sell Salesforce.com, United Airways or Federal Express.
What do you think of those short-sale stocks?
— VG: Detroit, MI
Dear MI: As you may have been told, a “short-sale” is a technique that allows investors to make money when a stock falls in value.
Yes, Virginia, investors can also make money if the values of Federal Express (FDX-$86.13), United Airways (UAL-$19.50) or Salesforce.com (CRM-$144.30) decline.
And while I think there's a fair chance the shares of UAL and CRM could fall in price by the spring of 2013, I'm less sanguine about FDX.
But that's why you pay your broker big bucks and only a dollar for this paper.
One simple explanation is that selling a stock short and hoping it falls in price is actually the analog of buying a stock and hoping it rises in price. However, the word “short” indicates you don't have the stock you are selling. Here's how it works. Assume it's a waxing gibbous moon and Countess Dracula — aka Mrs. Dracula — discovers the Life Sciences division of Bio-Rad Labs (BIO-$100.40), due to an unexpected product shortage, will be unable to produce Lucolyte 2-X/B, its best-selling, most profitable blood additive used for vampire agranulocytosis.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at email@example.com.