Finally, in a Vanity Fair article about Herbalife and hedge fund players, I found a definition (that I could understand) of what exactly is shorting a stock. Here goes. So you figure Company X’s stock is going to go down. (Or you intend to bad mouth it and try to make it go down.) You go to someone who owns, say, 1000 shares of Company X and borrow those shares. You promise to return the shares at a later date. You pay the lender some cash. Company X is selling for $35 a share. You sell the stock and get $35,000. Now, if it goes down to say $25 per share, you reach into your cash pool of $35,000 and buy 1000 shares for $25,000. You keep $10,000.
Oh by the way, if the stock goes up to $45 a share when it comes time to “return” the stock, you lose $10,000.