Research for Online Investors
This article originally appeared in MarketToday on
by John Dalt
enter trades to make small incremental gains on the market, whatever the trend may be. Sometimes this involves “shorting” a
stock. What does “selling
short” mean and how do we do it?
normally buy stocks that we think are going to appreciate in value. When they
go higher we sell them and pocket the difference in gains. Buy for $20 Sell for $22 = $2
Occasionally, we see a stock and think, "That stock cannot go any higher, it has to pull
back." When we expect a stock to go down we can reverse the process. Sell for $22, Buy for $20 = $2
do we do it? You must have a
“margin account” to have short selling enabled. That is, you must be able to borrow money
from the broker. You enter a symbol, quantity, limit price and process the order to “Sell
This notifies the broker that you want to ‘borrow’ shares of the stock and sell
them. The broker borrows
the shares from another customer and places an IOU in his account. The
other customer never knows this occurs as he has given permission in advance for the broker to borrow stock
from his account.
like to use limit prices that are higher than the market price. The idea is not to play the momentum of a stock
falling, but to catch it on its high of the day, before it starts to fall. When XYZ company reaches our limit price, the
sell order is triggered and we now show a negative number of shares in our account. The position may also be in red on your computer
screen, depending on your trading platform.
profitable trade, the XYZ stock must go down in price. When you are ready to close the trade, you enter
the symbol, quantity and order type (market or limit). Use ‘Buy to Cover’ to enter this
order. You are “covering the
short”, and closing the trade. You either gain or lose the difference in price between the open and the closing
points on “short selling”
Your broker may not always have stocks available for you to
short. If no stock is available, your
order will be rejected.
Your account may be charged interest on the value of the short position.
Brokers have different policies.
If the company you shorted goes bankrupt and the stock is delisted, you may not have
to close the transaction, which means you don’t have to pay taxes on the
Cautions on Selling Short. If the stock goes up, your potential loss
is virtually unlimited. This is explained simply because stock prices can only go to zero when you are long a
stock, so your potential loss is only 100% of your investment. A shorted stock can continue to go higher
and higher. You can lose
much more than the original price of the stock. The corollary is also true; you can only
make profit equal to the value of the stock. Your potential profit is limited in that the
price cannot go negative.
you are short a stock you must pay any dividends to the original owner of the stock. Always check the dividend history of a stock
before deciding to enter a short sale. This can catch even experienced investors. One of the real dangers is a ‘special dividend’
that is declared without warning. Special dividend announcements can cause a stock
price to spike making it hard to close the trade profitably.
hope this has helped you understand “short selling”. If you have questions or comments, please send
them to email@example.com
presented in this article is based on generally available news releases, corporate filings, current events,
interviews and the editor’s opinions. It may contain errors and you should not make investment decisions based
solely on what you believe you have read here. Do your own research, it is your money. If you lose it, it is your
responsibility, not ours or your grandmothers! The editor may or may not have a position in any securities
discussed. The editor may have held a position in a security earlier, or in the future.