Shorting A Stock...

Remember, these articles are not intended as recommendations either way...the topics I cover in these articles, whether IPOs, Selling Short or a particular stock, are for your information only. If anything, my aim is to aid you in your journey to understand investing and to know that you are in control of your money, as you should be!

Now, on to a question that was recently asked in the boards. What is selling a stock short, and how is it done?

Despite popular belief, shorting a stock is not as confusing as it appears. It can also be very profitable. Shorting stocks can best be compared to a craps table. If you put your chips down on the "Pass Line" you are doing what most of the people at the table are doing - betting with the crowd. Now, next to the Pass Line is a little alley known as the Don't Pass Bar. Usually empty, this is the place to put your chips if you want to bet against the roller. This is generally considered bad form and many people will dislike you for it...especially since you'll be smiling when they are frowning.

This is about the same for people who continually short stocks. When you short a stock, you profit when the stock falls. It's kind of an interesting concept, and not everyone knows that you can do it. Of those who do know, most won't, considering it bad form. We are not going to go into whether or not shorting is a good or bad idea. That is for another article. Here we will describe how it works.

First you need a margin account. To do this open a brokerage account (generally you need $2,000 to make it a margin account), and sign the form asking for a margin, not a cash account. The difference is that with a margin account you can borrow additional money that you pay interest on, to buy stocks. You're generally required to have enough cash to pay for 50% of a new transaction. If, for example, you put $10,000 into an account, you could purchase $20,000 worth of stock. This is "buying on margin." This type of account also allows you to short stocks, which you do by borrowing shares form a current shareholder. This isn't as hard as it sounds, it is something your broker does automatically. As soon as you get them, you then sell them at the current market price, and root for them to go down...way down. When you're ready to cash out either for profit or loss, you then return the borrowed shares and buy them. Your broker also does this automatically for you. So basically, when shorting stocks, the normal trade order is reversed, you sell, then buy. Keep in mind before shorting stocks that it requires your daily attention and unless you are able and willing to pay such attention, you should stay away.

Go To Page: 1

Articles in this Topic    Discussions in this Topic