Can someone please explain how Short sale works? How does one make money using this technique?

Question

I was approached by someone who say's he makes $100,000.00 a month doing this. Is this for real, or another scam?

Answer 1

Was this an attempt to get you to invest your money? Since you don't know this guy, why is he bragging this information to you? If he makes that kind of money doing this, then what does he need you for?

Anyway, it IS possible to make money shorting stocks. I have shorted stocks (made a little). It is VERY risky, however.

Essentially, shorting a stock means you sell stock you don't own. Kinda like making the calendar turn backwards. At some future date, you will then have to BUY the stock, to bring you back to zero.

Let's say Widgets Amalgamated is currently selling for $70/share. You believe emerging technology is going to render widgets obsolete, and the company will go bankrupt. You "sell" 100 shares for $7 (short....get it? You're selling them, but you're that many shares "short"...). The stock goes down the tubes in the next year, ending up at $10/share.

You then "buy" those shares at $10, making $6000.

How is that risky? If you're wrong, and WA introduces a new product and the stock goes up to $350, you lose $28,000!

Answer 2

A short sale is when an owner in trouble sells their home for less than their mortgage. Yeah, the guy probably does make money and here's how he most likely does it:

1) Find a homeowner in trouble. These are people who are close to foreclosure.

2) Make an offer on the house that is crazy low. Homeowners will arrange with their lender to have a short sale. They have to get permission for this transaction, so it's not an automatic just because they have an offer.

3) Close on house.

4) Sell house at actual market value, which is going to be a lot more than what you gave for the property.

I think this is a very unethical way to make money. The difference in the sales price and the mortgage will become unsecured debt for the homeowner in trouble. Now not only don't they have a house because they sold under duress but they still have some of the debt they were trying to escape. I realize that it is a consentual transaction, but I still think it's kinda slimy to take advantage of people in trouble. (*puts away soap box*)

It's probably for real (he is probably inflating his income a wee bit), but the guy is very good at convincing people to go in to debt to get rid of their properties and that is not as easy as it sounds. There is a lot of knowledge that is necessary to buy and sell houses in a market like the one we are currently experiencing. Housing prices are sliding in a lot of areas and that in and of itself is a very, very risky factor.

Good luck, please don't try to go in to the real estate market blind. I've watched people loose fortunes playing this game without the proper preparation.

Answer 3

You simply take a contract for the amount of money you would receive for a stock if you had it to sell. You promise to provide the stock some time in the future but you agree on today's price.
So if the price today is $50 and you sell short 100 shares then you are contracted for $5000. If the next day the stock goes to 40 you simply "buy it back" in other words buy it to give back as you have agreed to do. It costs you $4000 and so you make $1000. The problem is that if the stock goes up and keeps going up you will have to eventually pay a fortune to buy it back and fill the contract. As it keeps going up you will be forced to come up with cash to satisfy your brocker's "margin calls". The broker does this to insure your money is at risk and not theirs. Remember: "He who sells what isn't hisn must buy it back or go to prison.

Answer 4

SCAM CITY BABY! Nobody ever talks about their income unless they're complaining it's too low. What the other poster said is right. Extremely risky. Don't EVER invest in anything you don't fully understand. Ask him to show you his tax return. Don't get taken.