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Shorting stocks...  how can you sell something you don't own?
Make money if stocks go down!

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Short stocks 

SHORTING STOCKS OR AN INDEX.
As we all know, stocks and the stock market do not only go up.  Thankfully money is made as a stock goes down as well.

How do you make money if the stock market goes down?


enroll here

        If I short a stock it means I'm selling it on the hopes that it goes down in price where I may buy it back and keep the difference from the higher selling price to the lower buy back price.  It is the mirror image of going long a stock where I buy it low on the hopes it goes up in price and selling it at a profit.   So the question arises, 

        How Do I Sell Something I Don't Own?

     The answer to the question is that you borrow the stock from your broker first, then you sell it.  The broker gets it from his own inventory.  A Short Position is taking an uncovered position (meaning I don't own the stock) that benefits when the value of the stock decreases and may be closed at a lower price. For example, when shorting stock, you sell (borrow) a stock which you do not own and which you must replace at a later date. If the price of the stock lowers then you may profit by buying the stock (covering the position) at a lower price. However, if the price rises, you will realize a loss.  Just the mirror image of buying low and selling higher.

SHORT = I OWE THE STOCK.  
LONG = I OWN THE STOCK
 

BUT AM I ACTUALLY GOING TO SELL SHORT THE STOCK? POSSIBLY. I DON'T.  I USE PUT OPTIONS INSTEAD.

    I can short the stock directly in my margin account or I can buy Put Options on the stock at a fraction of the cost and risk.

You must understand margin and its use before you short a stock. When you buy a put option, your premium is your total risk.

Check with your broker for their margin requirements!

     As a trader you MUST learn to trade both sides of the markets otherwise you leave a lot of money on the trading table that should be in your pocket

     Shorting a stock is no mystery.  You sell it first and then buy it back to close your position.  The exact opposite of buying low and selling high.


Short Stock Position - a position initiated by selling stock in an opening transaction with the goal of buying it later at a lower price (i.e., sell high, buy low). To accomplish this, the stock must be borrowed from a broker-dealer before it can be sold.  You may only short a stock in a margin account, therefore there is an additional risk taken when shorting.  Review your broker's guidelines for using margin.

More on Shorting...a lot more, click here.

You can stay "short" as long as you want, as long as your margin limits will allow and/or your broker doesn't call the stock (see your brokerage contract re: shorting and margin requirements).  There are carrying cost as well, which is another reason I prefer to use Put Options.

The point is that the market does not only go up, and thus shorting is profitable too.  Why miss half of the market action?

Think about it.  To trade successfully you will NEED to know how to short or use Put Options and what to look for in the charts.
After all, the markets don't only go up, do they?

The Mechanics of Shorting

  • Trader decides to short a stock

  • Places order to "open" a position with a "sell 1000 xyz" order

  • Broker "loans the stock to you if it is available to your broker. There are instances where the stock is not available to the broker either.

  • Your portfolio will show a 'short' position of -1000 xyz or (1000) xyz

  • You must, at some point, buy back the stock with a "buy to close" order to "close" your position.  Automatically, the stock is returned to the broker and you keep the gain or loss.

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