How To Short A Stock
- Filed Under: Tricks and Tips
Did you know that you can make money on a stock by having it go down?
Well you can through a method called shorting a stock. Personally, I am not a huge fan of shorting, but that should not stop me from letting you benefit from it.
How to short a stock.
Although it is an easy process, it takes a little more work then simply buying stock. First, off you have to find out if your brokerage has shares to short. Unlike going long into a stock, shorting requires you to borrow shares, sell them to another buyer, and then eventually buy them back at a later time.
Obviously because you are borrowing the stock there is more risk. What happens if the stock goes up? You are going to lose money; however, unlike your regular stock buy, shorting has no roof, so technically your losses could be infinite; whereas, buying shares you risk only the capital you put in.
So to recap:
- Ask your brokerage for shorts (since there are so many different types, it is best to find out how within your specific brokerage). Usually it is as easy as just asking somebody (be it by online chat or phone).
- You borrow shares of the stock you want to short and sell them to another buyer. Eventually you will have to buy them back.
Example:
You feel Stock X will go down, so you decide to short it. You sell short 100 shares of Stock X at $10. Now you are credited with $1000 to your account. The stock falls to $8 dollars and you buy back the shares at a complete value of $800. Throughout that total transaction you have made $200 on Stock X going down.
Seems easy enough, but lets look at one more example:
Lets say instead of coming down to $8, Stock X actually bounced up to $15. Now you are required to buy back the stock (otherwise you risk losing even more). So now the complete value of your short shares is $1500. Subtract that from the $1000 you borrowed, and you are required to pay back another $500.
There is a high degree of risk with shorting, especially if you have no idea what you are doing. Yes, you are able to leverage the capital you really have by borrowing, but if that stock sky rockets higher, then you are forced to come up with the money to pay back your losses.
There are traders that have made millions off shorting stocks alone, but it takes discipline and dedication to execute it.
What do you think about shorting? Have any experience with it? Think you might give it a try?
