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Tech
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U.S. & World

How to Short a Stock?

By on March 14, 2013

How to Short a Stock?

Most beginner investors start out by buying shares of a company and holding until its value goes up in order to make a profit. Today we will show you how you can profit from playing the downside as well. One way to profit from a downward move on a stock is to short it.

What is shorting ?

Shorting is a way to profit from downward moves on a stock by asking your broker to lend you its clients shares for you to sell as long as you eventually buy back those shares and give them back to your broker. The reason why you can profit by doing this is because if you sell the stock at current prices and it goes down then you can buy it back cheaper and keep the difference. For example, if AAPL is trading at $440 today and I short it then essentially I am selling shares that are not mine for $440. If Apple tomorrow opens at $430 then I have basically made $10 per share I shorted since I can now buy them back at a cheaper price than I borrowed them for.

How to short a stock?

To short a stock simply login to your online brokerage and type in the name of the security you would like to short. On Etradefor example you will see a “sell short” button appear next to the ticker symbol if you are approved for shorting. Certain brokers require that you apply specifically for the ability to do this and most will require that you have a margin account. The reason for the margin account is simply because the risk you take by shorting is theoretically infinite. For example if you short AAPL at $440 today and it opens up tomorrow at $700 on news that the company had the greatest quarter ever profit wise then you will be out of a large chunk of money. To prevent your account balance from going negative brokers require that you have a margin account (sort of like a line of credit) so that you can eventually repay it.

Risks to shorting?

As previously stated the risks to shorting are huge if not managed properly or hedged with another financial instrument. If you would like to learn more about hedging your positions please check out some of our stock options articles explaining the various techniques you can use to hedge short and long positions from going against you. Just as there are risks to shorting there are also benefits. Stocks tend to fall quicker than they rise so if you’re looking for quick money and you’re good at picking out market tops then you can surely make a ton of money by playing the downside as well. Please check out our other articles on technical analysis so that you can make informed decisions about when to short a stock and when to play the sideways action.

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