In today’s market, the traders seeing the most success are those that utilize short trading in their day to day trading style.
At its core, short trading means that you are betting on a particular stock going down.
Personally, I am not a huge fan of shorting a stock. I actually think it has a small percentage effect on where the markets are today. I mean how can we expect people to believe in a stock to move higher, when they know that there are many people betting on the fact of it going down.
Yes, it does effect the value of a stock negatively.
Now, although I might not like shorting, it is not like it is going to stop anytime soon. Too many people are doing it, so you might as well know how to do it.
How to short a stock.
While it is a relatively easy process, it takes a tad more work than your everyday buy. First, off you have to find out if your brokerage has shares to short. Unlike going long into a stock, shorting requires you to borrow shares, sell them to another buyer, and then eventually buy them back at a later time.
Obviously because you are borrowing the stock there is more risk. What happens if the stock goes up? You are going to lose money; however, unlike your regular stock buy, shorting has no roof, so technically your losses could be infinite; whereas, buying shares you risk only the capital you put in.
So to recap:
- Ask your brokerage for shorts (since there are so many different types, it is best to find out how within your specific brokerage). Usually it is as easy as just asking somebody (be it by online chat or phone).
- You borrow shares of the stock you want to short and sell them to another buyer. Eventually you will have to buy them back.
Example:
You feel Stock X will go down, so you decide to short it. You sell short 100 shares of Stock X at $10. Now you are credited with $1000 to your account. The stock falls to $8 dollars and you buy back the shares at a complete value of $800. Throughout that total transaction you have made $200 on Stock X going down.
Seems easy enough, but lets look at one more example:
Lets say instead of coming down to $8, Stock X actually bounced up to $15. Now you are required to buy back the stock (otherwise you risk losing even more). So now the complete value of your short shares is $1500. Subtract that from the $1000 you borrowed, and you are required to pay back another $500.
So as you can see there is a high degree of risk with shorting if you have no idea what you are doing. On the one hand, you are able to leverage the capital you really have buy borrowing, but if that stock sky rockets higher, then you are forced to come up with the money to pay back your losses.
If you follow StockTwits, then you are likely to see floods of people tweeting about shorting a specific stock. Timothy Sykes has made millions off shorting stocks alone, and he has helped others bank of shorting. He runs a pretty cool system if you are disciplined and dedicated to follow it.
What do you think about shorting? Have any experience with it? Think you might give it a try?