Short Selling: A Quick-Start Primer
Short Selling: A Quick-Start Primer
Shorting a stock
To short a stock, you must first make sure you're set up for a margin account with your broker, which will allow you to borrow shares. Go to your broker site, enter the ticker, then use the command "sell to open" or "sell short." Keep in mind that not all stocks are available for shorting.
Once you make the trade, you'll be given a lent payment as a negative number in your account. When the stock goes down, you can buy it back using the "buy to close" command. The difference will be left in your account as your profit.
If the stock price increases to a higher share price, you will eventually need to buy it back at a higher price and just take the loss. You must make sure you have enough money in case this happens. Selling short is typically a short-term strategy, so it is not the best idea to wait for years in hopes that changes in the market will offset your losses. In fact, waiting too long may worsen your losses and wipe you out entirely, so it's important to stay on top of things.
Other considerations
Some things to consider when selling short: First, you will have to use up any dividends you may receive when you borrow shares. Second, there will be an interest on the loan that you will need to pay once you've borrowed the shares, so that cost should be factored into your bottom-line projections. Lastly, beware of the short squeeze—if the stock price goes up, your broker can decide to force you out of your short position should it need to give the shares back to the owner.
All in all, short selling is important for providing information about the market, particularly which companies are underperforming. However, finding the right companies to short can be tricky because the market is generally on a long-term upward trend. If you are looking to short, look for overvalued companies with considerable debt loads, low profits, few competitive advantages, and shaky management. To succeed with shorting, you must get into a frame of mind that is opposite of most stock investors—find opportunities with limited upside risk and large downside potential.
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