Shorting

Shorting Stock for Beginners

Shorting stock occurs when the investor borrows stock to sell with the expectation that the price of that stock will drop. The investor then buys the stock back to replace it at a cheaper price. Clear as mud? Let’s explain further. When an investor goes long on an investment, it means that the investor bought the stock with the expectation that the stock price will rise in the future. On the other hand, when an investor shorts a stock, he or she borrows from their broker, again with the expectation that there will be a decrease in the price of the stock. It is important to understand first how the stock market works before attempting to understand the concepts associated with short selling stock.

Let’s take a look at the process of shorting stock. When an investor short sells a stock, their broker will lend the stock to you. The stock actually comes from the broker’s own inventory, from another brokerage firm’s inventory, or from one of the firm’s other clients. The shares of stock are then sold and then the proceeds are credited to your account. At some point, the investor must buy back the same number of shares of stock to return them to the broker. If the stock price in facts drops, as you predicted, you then buy back the stock at the lower price, pay back the broker at the current market price, and make a profit. If your predictions were incorrect, and the value of the stock increases, you then again, have to buy back the stock at the higher price, pay back the broker at the higher market price, and you lose money. Keep in mind that if the stock splits while you short, you then owe twice the number of shares at half the price! It is wise for investors to set stop loss orders when shorting stock in order to limit their losses. (Terms such as stop loss and others can be found in the glossary of stock market terms in this site).

When learning about short selling and trading stock , you must also learn about buying stocks on margin, as well as other basic stock market terminology . This is the borrowing of money from a broker (as mentioned above) in order to purchase stock. It requires that you open a margin account with a brokerage firm and there is a minimum deposit that is required. This minimum deposit is typically around $2,000 but it ranges from firm to firm. This money is used as collateral so that if the value of stock works against you, then the account holder is required to deposit more cash or to sell a portion of the stock.

Please also read about Japanese Candlesticks which is another trading strategy used by some of the world’s most successful traders. It is the fastest way for new investors to quickly and accurately read stock charts. Once you are comfortable with the major candlestick signals, expand your expertise by learning the secondary Candlestick Patterns . Combine these with your favorite technical analysis indicators, such as the moving average convergence divergence indicator , and you have the perfect trading arsenal for evaluating stocks, currencies, commodities, or exchange traded funds .