| There are times when you just know that a | | | | wrong end of the trade, and the price of the stock |
| company's bottom line is suffering and will continue to | | | | rises then you'll have to buy the stock at a higher |
| suffer. This could be due to bad leadership, poor | | | | price. |
| marketing, ineffective sales, or products that are | | | | There are usually no time restrictions on how long |
| way ahead of their time or outdated. Would you buy | | | | you can keep a short position or sell a stock short. |
| stocks of such a company? Of course not. In fact if | | | | But, be aware that this will cost you more because |
| you knew someone who had this stock, you would | | | | the stocks that were bought were bought using |
| be shouting Sell! Sell! Sell! from the rooftop. But if you | | | | margin (i.e. brokerage's money) and there is an |
| wanted to personally benefit from this information | | | | interest associated with borrowed funds. |
| what would you do? You would sell these stocks | | | | There are two reasons why investors or traders sell |
| short of course. | | | | a stock short (1) Speculation - They feel that a |
| What is short selling? It is selling stock that you (the | | | | company's stock is overvalued and it is likely to go |
| seller) do not own. How is this accomplished? Your | | | | lower in the short-term. (2) Hedge - Sophisticated |
| broker will lend you shares of this stock from its own | | | | investors and money managers use short positions or |
| inventory. At some point you will have to close this | | | | shorts to offset their long positions. This is to |
| 'short' position by buying back some of the shares of | | | | minimize their losses in case they made the wrong |
| the company and you'll profit from the difference | | | | call. |
| (assuming the price drops). But, if you are on the | | | | |