| "> | | | | Some of the following market situations help to |
| 'Shorting' or short selling refers to the selling of a | | | | predict a fall in price of stocks: - |
| contract, a bond or stock or a commodity that is not | | | | - Market indexes coming near the prior resistance |
| directly owned by the seller. When practicing short | | | | levels. |
| selling, a seller is committed to purchase the stock or | | | | - Market trend showing technically overbought levels. |
| commodity previously sold. | | | | - Restlessness before the announcement of a state's |
| Short selling stocks means to take the stock from a | | | | government. |
| broker on loan and sell it off to someone else. This is | | | | - Market vulnerability during scandals. |
| done so that the seller buys back the stock, when | | | | Large volume selling of stocks often result in |
| the price falls. The shares are returned to the broker | | | | short-term high profits. However, there are certain |
| from whom they were initially borrowed. The | | | | guidelines to be followed for successful short selling. |
| shorting profit or the difference in price goes to the | | | | They are: |
| seller. Short selling of stocks is a technique used by | | | | - All stocks are not 'short' able. Generally, brokers |
| investors to capitalize on a probable decline in the | | | | inform a seller whether a stock can be used for |
| stock price. | | | | short selling or not. |
| To understand this better, let us consider a | | | | - Sellers must open a margin account for short selling. |
| company, say, ABC whose shares currently sell at | | | | This depends on the minimum balances and cash |
| $12 each. A short seller borrows 50 shares of ABC | | | | reserves. Sellers are required to sign a contract |
| and then sells those shares to someone else at $12 | | | | agreement with the brokers to open a margin |
| per share, for a total of $600. Now, if in future the | | | | account. This agreement clearly states that a seller |
| price of shares of ABC falls to $10 per share, this | | | | will follow the rules and regulations stated by the |
| short seller would then buy back those 50 shares at | | | | broker. |
| $500 ($10 multiplied by 50 shares), send back the | | | | -Target bad-performance, overpriced companies, |
| shares to the original owner/broker and make a | | | | since the probability of a fall in the share price |
| profit of $100. | | | | involves lesser risk. |
| Short selling is risky, if the price per share goes up | | | | - Traders and short sellers should use stop orders to |
| instead of declining, as expected. Suppose the price | | | | protect their capital from loss. Generally, brokers |
| per share of ABC goes up to $15 per share, then the | | | | prevent a seller from suffering loss more than the |
| short seller will have to cash in the previously sold 50 | | | | principal. They may either compel the seller to quit |
| shares at $750, return the shares to the original | | | | the transaction or they may deposit funds to |
| owner and incur a loss of $150. | | | | increase the seller's capital. |
| Shorting is a transaction done on margin. Most | | | | The short selling of stocks involves a lot of discipline. |
| brokers do not agree to short selling stocks below | | | | Sellers need to be proactive, alert and disciplined |
| $5. This enables the investors and short sellers to | | | | when shorting stocks. |
| indulge in the high-risk trading of stocks. | | | | |