Short Selling A Stock Is Not As Difficult Or Risky As You Might Think

…If you know [how to] potentially profit from the stock market even when you expect a stock price to crash, you can often continue trading regardless of the market climate…Learning how to short sell a stock takes practice, but it’s not as difficult (or as risky) as many people believe.

What Is Short Selling?

…When you go long on a stock, you buy shares at a particular price point because you believe the stock price will increase. If the price moves in the direction you anticipated, you can sell your shares in that stock at the higher price point and make a profit. A short position is the exact opposite. Short selling a stock means you’re betting the stock price will decrease over a specific period of time.

How to Short Stocks

…To short a stock, you borrow shares of that stock from your broker at a certain price point…Later, when the stock price drops, you buy those shares back to make a profit… Let’s look at an example:

• You believe that stock XYZ will drop in price in the future. It’s currently trading at $20 per share, so you issue a short sale order through your broker to sell 100 shares of XYZ.
• The broker locates the necessary shares and sells them, putting $2,000 in your trading account but, remember, you borrowed those shares.
• Later, you buy back the shares at a price point of $10, meaning that you only have to spend $1,000 of the $2,000 you pocketed. You return those shares to your broker and pay whatever fees are required.

That’s a simplistic view, but it’s the basic gist of how to short a stock.

…You’ll need a margin account to short stocks, which means that you’re able to borrow shares in a stock from your broker…Margin simply means that you’re buying or selling shares in a stock that you don’t own. That’s why many speculators are drawn to short selling.

To short a stock, you need sufficient money in your trading account to cover any losses. You have to know your risk tolerance — backward and forward — and understand that the stock could go in the opposite direction.

How to Short a Stock With Options

Many people consider shorting a stock with options as the best possible move…[and] is called placing a “put” option – a bet that the stock price will decrease. A “call” option, on the other hand, relies on the stock price’s increase…They’re called options trading because you have a choice. For example,

• if you have a put option on 100 shares of stock valued at $50, and the price drops to $40, you can exercise your put option and make money.
• If the stock price movement doesn’t go your way, you can opt to not complete the contract. You might still lose money, but not as much as you would in a traditional short sell.

Hang tight for tomorrow. I’ll go over my seven steps on how to short a stock. Cut and dry, no guessing. Just for you…

Related Articles from the munKNEE Vault:

1. Is Short Selling Stocks Worth It?

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