A Clearer Explanation on How Short Selling Stocks Really Works

short selling stocksShort selling in the stock market is a method used by many big time stock investors out there who really know what they’re doing.

In reality, they did not start as knowledgeable as they are; they’ve spent lots of time learning all the tricks before they actually start shorting stocks.

This method is very popular as of now, it’s being used on a daily basis and making lots of profits for many traders.

I know it’s very likely that you’ve heard of it before, but you many not know how short selling stocks really work.

This post is tailored to enlighten traders like you who’s looking to learn this method or to learn some more about it. At the end you should feel very comfortable on how to explain this method to any of your colleagues.

What’s short selling in the stock market?

It can be confusing because you’ll be selling something you don’t even own. Short selling a stock means that you borrow the shares from your broker in the hope that those shares value will decrease.

Once their value has decreased you can sell them, and then you buy them back. I warned you it was a confusing method, but that’s how it’s done.

This process of selling those shares is what creates this short position which should be covered by buying them back. So that’s why it’s the exact way short selling a stock works.

And the way you’ll earn your profit from this method is only if the price drops from the price you’ve initially borrowed the shares from your broker.

Unfortunately, you’ll have to buy back the shares whether the price goes up or down to cover your debt.

What kind of stock should you short sale?

Don’t think you can just jump any stock and start short selling it. In fact, short selling a stock is a very difficult thing to do. Not every broker will allow you to short sale because they know how difficult this method is.

When you’re short selling stocks you have to be sure that this company’s price will definitely goes down according to the information you’ve gathered.

Remember that there’s no company that’s working toward regression, they’re all working toward success. In order to find one that looks like its stock is going down in value you’ll need to know the basics needed to be looking for.

It’s very important that you know how to read a stock’s chart. Stock charts can tell you whether or not you should short selling a stock. When you’re looking through a chart, try to spot the trend.

Most investors would short sale a stock that’s already on a down-trend. It makes complete sense because there’s more chance for stocks that are going down-trend to go some more. On the other hand, you can’t really tell 100% when a stock is about to start decreasing in value.

Type of account needed to short selling stocks

You can’t short sell with any type of account. When you’re opening a stock account and know you’ll be short selling, make sure that it’s a margin one.

If you don’t have a margin account then you won’t be able to short sale any stock. So, your first step should be to open a margin account.

What are the risks of short selling stocks?

Stock trading itself is already a risky investing option. When you choose to short selling stocks it’s even riskier.

Since there’s literally no limit as of how high a stock can increase in price, this makes it very dangerous to investors when short selling. You might short sale a stock and think that it will go down very soon, unfortunately for you the price increases ten times more.

That’s very scary, right? Yes, I know, but that’s the reality you have to hold in your mind as you’re short selling stocks.

With that being said, more precautions are needed in order to be both safe and profitable with your investment.

The spinoff risk is also a very dangerous one. It’s even riskier than many people think because once that takes place you would end up owning shares from two different securities, and even more.

The worst part is when all these securities go against you. It would be very hard to manage your investment in a case as such. The majority of stock traders who got cut up in a situation as such usually lose big time.

Why do investors short selling stocks?

When someone knows how to do something very well, he or she will usually feel more comfortable at it than having to do something else.

It’s the same thing for short selling stocks; some traders are able to find stocks that are declining in value faster than those that are increasing in value.

Whether you’re trading long or short there’s still the same opportunity to make profits. Therefore some traders will trade short while others will trade long.

In return that helps the market, if we weren’t trading from both ways we would have had more problems with volatility. So, short selling is helpful to all us although you may not be a primary user of this method.

To conclude

Short selling stocks and owning some stocks shares are two different things. You can’t plan to hold onto a stock that you’re short selling for too long because it’s not yours. You borrow this stock to hopefully make some profits off of it.

From this article I’ve share much of the information needed to help you short sale. As a reminder, you’ll need a margin account in order to be able to short selling stocks.

Under no circumstances should you underestimate going short. It’s risky, requires lots of knowledge, and you have to always be prepared for the worse.