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