| We normally buy stocks that we think are going to | | | | either gain or lose the difference in price between |
| appreciate in value. When they go higher, we sell | | | | the open and the closing price. |
| them and pocket the difference in gains. Buy for $20 | | | | A few points on "short selling" |
| Sell for $22 = $2 profit. | | | | - Your broker may not always have stocks available |
| Occasionally, we see a stock and think, "That cannot | | | | for you to short. If no stock is available, your order |
| go any higher, it has to pull back." When we expect a | | | | will be rejected. |
| stock to go down we can reverse the process. Sell | | | | - Your account may be charged interest on the value |
| for $22, Buy for $20 = $2 profit. This is called "Selling | | | | of the short position. Brokers have different policies. |
| Short", or a "Short Sale" | | | | - If the company you shorted goes bankrupt and the |
| How do we do it? You must have a "margin account" | | | | stock is delisted, you may not have to close the |
| with your online broker to have short selling enabled. | | | | transaction, which means you don't have to pay |
| That is, you must be able to borrow money from | | | | taxes on the gain! |
| the broker. You enter a symbol, quantity, limit price | | | | Cautions on Selling Short. If the stock goes up, your |
| and process the order to "Sell Short" This notifies the | | | | potential loss is virtually unlimited. This is explained |
| broker that you want to 'borrow' shares of the | | | | simply because stock prices can only go to zero |
| stock and sell them. The broker borrows the shares | | | | when you are long a stock, so your potential loss is |
| from another customer and places an IOU in his | | | | only 100% of your investment. A shorted stock can |
| account. The other customer never knows this | | | | continue to go higher and higher. You can lose much |
| occurs as he has given permission in advance for the | | | | more than the original price of the stock. The |
| broker to borrow stock from his account. | | | | corollary is also true; you can only make profit equal |
| We like to use limit prices that are higher than the | | | | to the value of the stock. Your potential profit is |
| market price. The idea is not to play the momentum | | | | limited in that the price cannot go negative. |
| of a stock falling, but to catch it on its high of the | | | | While you are short a stock you must pay any |
| day, before it starts to fall. When XYZ company | | | | dividends to the original owner of the stock. Always |
| reaches our limit price, the sell order is triggered and | | | | check the dividend history of a stock before deciding |
| we now show a negative number of shares in our | | | | to enter a short sale. This can catch even |
| account. The position may also be in red on your | | | | experienced investors. One of the real dangers is a |
| computer screen, depending on your trading platform. | | | | 'special dividend' that is declared without warning. |
| For a profitable trade, the XYZ stock must go down | | | | Special dividend announcements can cause a stock |
| in price. When you are ready to close the trade, you | | | | price to spike making it hard to close the trade |
| enter the symbol, quantity and order type (market | | | | profitably. |
| or limit). Use 'Buy to Cover' to enter this order. You | | | | I hope this has helped you understand "short selling". |
| are "covering the short", and closing the trade. You | | | | |