All stocks markets globally are falling in value this year.  The DOW, NASDAQ, S&P500, as well as all European and Asian Markets are well below their highs of 2007 and are negative for 2008. Nearly all mutual funds are not making money this year.  How is it possible that the ZIG Traders Trading Fund is above +34.41% (as of March 24, 2008) on an annualized basis despite all these market mishaps? The answer is on what we call "shorting a stock".

So how does shorting a stock really work?  Let us consider the following example. Assume that I own 10 shares of company XYZ at $50 per share. You then believe that the stock price of XYZ is very high and is going to crash or fall some time soon. Since you are so convinced that the stock will crash, you come to me, and ask to borrow my ten shares of XYZ and sell them at the current market price of $50. I agree to lend you my shares as long as you pay me back ten shares of XYZ at some point in the future. You take the ten borrowed shares, sell them for $500 and pocket the money (10 shares x $50 per share = $500).

The following week, the price of XYZ stock falls to $20 per share. You call your broker and tell them to buy 10 shares of XYZ stock, at the new price of $20 per share. You pay them the $200 (10 shares x $20 per share = $200). A few days later, you pick up the shares of XYZ and bring them to my office. "Here are the ten shares I borrowed," you say as you put them on my desk.

Do you see what happened? You borrowed my shares of XYZ and sold them for $500. The following week, when XYZ fell to $20 per share, you repurchased those ten shares for $200 and gave them back to me. In the mean time, you pocketed the difference of $300.

In real life, you do not borrow the shares from me of course.  You would normally borrow it from your broker whom you have created a margin account with. 

Finally, you would then ask the million dollar question: how do you know when a stock will fall in price? Now that is a ZIG traders secret.