When someone buys stock, they get a small amount of ownership in the company – you can buy multiples of the same stock to gain more ownership. But how do we make money? See, the thing is, if a company is earning more money, its share price may also increase. As a result, shareholders also make money. For example, let's say I own one share of Company X and that share is worth $10. Suddenly, Company X’s sales started to increase and, as a result, people became more optimistic about the company. So, their share price increases to $15. From the $10 I spent for a piece of ownership, I ended up with $15, meaning I made a profit of $5.
This is all good and jolly but, if we’re not careful, we may lose money. For example, let’s say that the next week, Company X’s sales start to decrease instead of increase. As a result, people are no longer optimistic about the company’s future and start selling their shares. So, the stock price goes down to $8, netting me a loss of $2. Luckily, we can short a stock which bets that a company will perform poorly and their share price will go down. When we short, we’re borrowing shares of a stock from someone else (usually a brokerage). Then, we sell the borrowed shares at the current market price, even though we don’t own them. Eventually, we have to buy back the same number of shares to return them to the lender. If the stock price falls, we’re buying back the shares at a lower price and, therefore, making a profit. Going back to our example, let’s say Company X’s share price is currently at $10. I had a feeling that the company wouldn’t perform as well and that their share price may decrease, so I shorted the stock. Fortunately, my prediction was correct, and their share price dropped to $6. By shorting, I made a $4 profit. If I had bought the stock instead, I would have lost $4.
Overall, buying low means purchasing stocks when their value is relatively low, expecting them to rise. Selling high, as in shorting, flips the concept in which you sell borrowed stocks at a high price, then buy them back cheaper to maximize profits.
**For those who are interested they can read the book, “Buy Low, Sell High: The Simplicity of Business Finance” by Philip Young.