| Tonight, we want to review shorting. I don't | | | | The price of ABC goes down for you. Let's |
| know why but so many people become uneasy | | | | say that ABC declines to $45. At 45 you |
| when they hear this term. I guess that | | | | decide that it may not decline much |
| occurs when there is not a clear | | | | further, so you click your "BUY" button at |
| understanding. | | | | your brokerage account to buy 100 shares at |
| | | | $45. |
| Shorting is used to capitalize on a drop in a | | | | |
| stocks price rather then a rise in price. | | | | You shorted (sold/borrowed) the stock at 50 |
| Buy a stock...goes up you make money. | | | | and bought it back at 45. You made $5 per |
| Short (sell) a stock...goes down you make | | | | share in profit or $500. |
| money. | | | | |
| | | | You sold the borrowed stock for $5000 ($50 X |
| But how do I sell a stock that I do not own | | | | 100 shares) and bought it back for $4500 |
| you may ask. You borrow the stock from | | | | ($45 X 100 shares). |
| your broker and sell it to someone else. | | | | |
| | | | All the mechanics of borrowing the stock, |
| Your broker has it in inventory or they | | | | debiting your account (when you buy), |
| borrow it from another brokerage firm. They | | | | returning the stock, crediting your account |
| actually loan you the stock to sell to | | | | (when you sell) is handled seamlessly by your |
| someone else. This is all done automatically | | | | broker. |
| and instantly when you place an order to | | | | |
| short a stock. | | | | Of course you can lose money if the stock |
| | | | goes up when you place a short order (like |
| Once you have shorted the stock (by borrowing | | | | a stock going down when you place a buy |
| it) you must eventually return the borrowed | | | | order). That's why it is imperative to be |
| item...the stock, back to your broker. | | | | properly prepared when entering the stock |
| | | | market. |
| You do this by placing a buy order on the | | | | |
| stock you are holding short. The stock you | | | | The point is, do not limit yourself to making |
| buy is then returned. Again this happens | | | | money in only ONE direction. When the |
| instantly. | | | | market is crashing you need to be shorting |
| | | | stocks, not buying or holding on to your |
| Example: You decide that stock ABC at $50 is | | | | buys. And when the market is taking off, |
| about to go down so you want to short the | | | | you need to be buying. |
| stock. You click your online account | | | | |
| "Short" button to place the order, let's | | | | Don't limit your income potential by only |
| say 100 shares of ABC at 50. | | | | purchasing stocks. |
| | | | |