Question by Chip: How does one “Short Stocks” and make money?
I’ve heard you can make money “Shorting Stocks”, but quite frankly the concept is quite confusing. I am new to Answers, and have been stumbling around in Google results trying to find how to make money when a stock goes down instead of up. Can someone, hopefully a savvy investor, let me know how this all works, if I need a special brokerage account, or what specific signs to look for when a stock is about to “Short”. Thanks for all your help.
Best answer:
Answer by Steve B
When shorting, you essentially agree to sell shares at a given price, betting that at some time in the future, the price will be lower when you buy.
Read here
http://en.wikipedia.org/wiki/Short_(finance)
What do you think? Answer below!
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{ 3 comments… read them below or add one }
If you are new to investing, i recommend you do not short stocks. The reason being, is that you can lose an unlimited amount of money.
Shorting a stock is: selling a stock before you buy it.
Shorting stock is selling stock that you don’t own, hoping that it falls so that you can buy it back at a cheaper price. You need a “margin account” to short stocks, since you will be borrowing from your broker.
Here is how shorting stock works:
1) JPM is at 33 . You think it will drop to at least 30
2) You own no JPM shares, so you place an order with your broker to “short sell 100 shares of JPM”
3) Your broker lends you 100 shares of JPM. They charge you interest (margin) maybe 7% APR.
4) Your broker than sells the 100 shares you borrowed and deposits $ 3300 cash in your account (100*$ 33) , minus the sales commission (typically $ 5-$ 20)
A. JPM drops to $ 30
5) You buy back 100 shares of JPM for $ 3000. You keep the $ 300 as profit , minus another commission charge and the accumulated margin interest.
B. JPM rises to $ 40
5) Your account had a little less than $ 3300 from the sale, but it would cost you $ 4000 to buy back the stock you shorted. The broker may make you add more money to the account or liquidate some of your other stocks. This is known as a “margin call.”
Keep in mind that when you buy stocks (you are “long” stocks), the most you can lose is 100% but you have noe ceiling on how much you can make. When you short stocks, the most you can make is 100%, but you can lose much more. For example, if you shorted 100 shares of a $ 1 stock that went up to $ 3 , you would have been paid $ 100, but you would need $ 200 more dollars to buy it back.
Anytime you want to investigate a new strategy, “paper trade” (make imaginary trades and keep track of how they do) your strategy for at least two months (preferably 6 months). Make sure you see how it behaves when the market moves in your favor and also against you.
The answer, to the first part of your question iseasy. Instead of buying stock first and then selling, you sell stock first and then buy back to close. The mechanics depend on where, and with whom you are dealing. Most brokers do not allow, in the normal course of things, allow you to go short (uncovered anyway). Of course there are other ways like spread betting, CFDs, options, short covered warrants etc. etc.
It is considered to be a very risky game (but just think who would be better off now over the past year, someone who was shorting or someone who was going long??) and as you don’t seem to understand the concept I would steer well clear
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