Selling Stocks Short

You’ve taken time to properly analyze the stock you’ve picked. You’re ready to make your move. So, you choose to sell a stock short. Selling a stock short means you sell something you don’t have and buy it later in hopes of making a profit from a falling stock price.

How to Sell a Stock Short

Borrow shares of stock from your broker so they can be then sold in the open market. The broker may have these shares in their own inventory or may obtain them through other clients. The money from the sale goes into your account. Next, buy the same shares on the open market and return them to the broker. If the “buy-to-cover price” (the price you paid for the stock) is less than the selling price, then a profit has been made. However, if the “buy-to-cover price” is higher than what you sold it for, obviously you’ve lost money.

When you borrow stocks from the broker, he/she charges you interest on the balance made. The money is put in a margin account. If you’re unable to perform maintenance management requirements, you could be forced by your broker to close your short position. Also, you can’t short a stock that’s less than $5 per share.

The Risks of Short Selling

Selling stocks short can be risky because it creates pressure on the trader to buy these stocks in the near future. It’s important to find out how many others are short selling at the same time because this can drive the stock’s price up. To do so, look at the short-interest statistics published in Barron’s and Investors Business Daily near the end of each month.

If several people are short selling, you risk finding yourself in a position called a “short squeeze.”  This occurs when several short sellers are seeking to sell and get out of their position as the stock price rises. Every share of the stock that has been shorted must eventually be repurchased. This can hang over the head fo the trader,creating future buying pressure.

 

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