Stocks Short Selling

By Ahmad Hassam

In nutshell, in short selling stocks, an investor who is short selling is borrowing stocks from the brokers and selling them to another buyer. At some point, the investor has to buy back the stock ideally at a lower price to make profit and return it to the broker. The sale money goes to the account of the investor.

You must be proficient in using technical indicators if you want to become a trader. Without learning technical analysis, you will always be doing trading on your hunches which is a bad thing. Suppose you are using the RSI technical indicator that is giving a crossover sell signal. All signs are pointing towards at least a small pullback. You feel that the stock ABC is overvalued at $60 and at some point in the near future the market will make a correction.

1000 shares of stock ABC are sold at $60 and $60,000 is placed in your account. You had placed an order with your broker to short 1000 shares of ABC stock at $60. Over the next week, you are jittery as the stock ABC instead of going down climbs to $65.

Stock prices can go up as well as down. Technical indicators can give you a likely direction of the market but they are never 100% right. Did you cater for the situation when the stock price rises instead of falling? However, you have catered for this eventuality by placing a stop loss at 10% of your account. This comes out to be $6,000. So the stop loss is not triggered and you are still in the market hoping for the price to stop going up.

You are prepared to lose $6,000 in anticipation of a stock price tumble as your technical indicators are giving you the sell signals. If the price goes up to $66, your stop loss will be triggered and you will be out of the market.

Every quarter companies are supposed to release their earnings reports. You can time your trade around the release of such a report. Now most earnings mishaps last a few days. So you wait and don't cover your short position for the next few days. Suddenly on the release of a disappointing earnings report, the stock price tumbles 20% in one day.

Stock ABC price falls to $45, you decide to cover your short position. In order to close your position, you need to buy back the 100 shares of ABC that were sold short earlier at the market price of $45.

Now should be able to understand short selling as easy as long buying. With this simple example, you should be able to understand the mechanics of short selling stocks. You pay $45,000 to buy back 1000 shares of stock ABC and return them to your broker. So your net profit in this case is $60,000-$45,000= $15,000.

Short selling and long buying are the exact opposites of each other. Assume that you had bought the stocks for $45 per share and sold them at $60 per share, the same profit would have been made. In reality, you paid $45 per share to buy ABC stocks and sold them at $60 per share giving you a profit of $15 per share.

The goal is to sell it at a higher price but in the case of short selling stocks, selling takes place first instead of buying when you short a stock. The goal of buying a stock is to sell it at a higher price in the future. Do you want to try short selling now? - 23229

About the Author:

Mr. Ahmad Hassam is a Harvard University Graduate. Try This Cash Printing Forex Signal Service From Heaven! Learn Swing Trading!