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