Before you think about trading stocks in this manner, you need to have a basic understanding on how to trade stocks normally. There’s quite a bit to shorting a stock, but if you don’t know the traditional way of investing or trading, you could lose more than you’ll ever want to. Think of this article as your guide to shorting stocks for dummies. What I mean by that is, I’ll try to break it down in a way that a beginner investing in the market will be able to understand. I was trading stocks for a few years before I started shorting any. The reason for that is you can lose more money shorting a stock than you can by investing in it.
Typically when an investor buys a stock, he is looking for it to go up in value. The old buy low, sell high may come to mind. Most of my trading is for the purpose of the stock price to rise. In the case of shorting a stock, the trader is looking for the stock price to fall. Yes that’s right, buy high and sell low. I call them traders because they are not looking to see the company grow, just their portfolio.
Let’s look at an example, company XYZ’s stock price is $100 per share. For whatever reason, maybe the company isexpected to release a bad quarter because of the economy or has had some bad situation happen recently like what happened to BP (British Petroleum). A trader will go out and “borrow” shares from another trader or a broker and pay them the current stock price of $100 per share on the grounds that he will return the share within a certain time period. The trader turns around and sells the shares at the current price and takes the money for other transactions.
During the period, the stock price falls to $75 per share.Now he has to return the shares to whomever he borrowed them from, so he buys the share at the lower price and gives them back to the broker or trader he got them from. He has now made $25 per share without ever owning them. This process happens all the time, but if you are not careful in your research, you will lose (and in some cases, lose big).
The reason I say you can lose big is because unlike traditional trading where if you buy a stock at $10 per share, you can only lose $10 per share. When you short a stock and the price rises, you stand the chance of losing more than just $10 per share, especially if the stock price jumps to $30 a share.
So if you’re going to short stocks, be prepared for what may happen if you’re wrong.
Related posts:
- How To Short Stocks If you’re a beginner investing in the stock market, before...
- Looking For Undervalued Stocks Everyone loves a bargain. Why not apply that bargain shopping...
- On Learning How to Trade Stocks – A First Lesson For anyone wishing to learn how to trade stocks in...
