Short selling is betting against a stock, making money if the stock goes down in value. This is an advanced trading strategy with many unique risks and pitfalls. Many investors feel that shorting a stock is “un-American” because you are betting against our economy. However there are research analysts searching for overvalued companies that look like they have a chance of going down in value. You are not really betting against the company, as much as you are betting against the value put on the company.
2. You sell the borrowed stock to open the position. You now have a short position as opposed to a long position. Your goal is to buy your short position back at a lower price. Your account will be “marked to market” which means, because you are on margin, if the position goes against you (stock price goes up) you may get to a point that your brokerage firm will require you to put up more equity (money or stock).
3. When you close out your position, if the stock has gone down in value, you will make money (buy it back at lower price). If the stock price has gone up, you will lose money because you sold the stock at a lower price.
There are other ways of making money if a stock goes down in value. In the stock option market you can buy a put. A put goes up in value when the stock associated with the put goes down. There are also ETF’s (exchange traded funds) that are based on shorting a particular index, sector or commodity. This is probably the easiest way of making money on the downside. Before you invest in an ETF that shorts, make sure you understand the underlying investment.
In today’s volatile market, it is beneficial to be able to make money on the short side. See a financial professional to get you started in the right direction. There are many moving parts but if you can work with someone or can do it yourself it can help you “protect the downside”. For more information on portfolio management or for any of your financial planning questions, feel free to email Andy at email@example.com or Contact Us.