Shorting Stocks
Many people think that you buy stocks and wait for the price appreciation to take place to make a capital gain. You can not only buy stocks and make profit when the stock price increases as the market goes up but you can also make profit by selling or shorting stocks as the stock price goes down as the market falls.
What is shorting stocks? You short the stocks by borrowing them from your broker and selling them to another buyer in the anticipation that the stock price will go down. Later on you buy back the stocks at a much lower price and return them to your broker. The difference between the selling price and the buying price is your profit. You only need to know how to read an email to try this cash printing Forex Signal Service from heaven. Learn Fibonacci Retracement. Trade Dow Futures!
Shorting stocks works when the stock price goes down. In case the stock price goes up, you can end up with a loss instead of a profit. Theoretically, the stock price can go up and up making your loss infinite. However, practically this cannot happen as at some stage you will receive a margin call from your broker.
In 2008, many banks and other financial institutions went bust within a matter of days. It was astounding because before their sudden bankruptcies, many were thought to be financially healthy. Some people had blamed unnecessary shorting of the stocks of these companies for their suddenly going belly up. Due to this reason, stock shorting was banned for a number of stocks for some time
So how does shorting stocks work? Suppose stock ABC is selling at $70 and you think that its price will go down in the near future. There can be many reasons behind your judgment. Anyway, you borrow 1000 ABC stocks from your broker and sell them in the market. You get $70,000.
The price does not go down. You had a stop loss of 10%. So the price goes up to $75 but the stop loss is not triggered. Suddenly a bad earnings report for the quarter is released by the company headquarters. The price suddenly plunges to $50. Since the effect of the bad news usually lasts a few days, you wait for two days and buy back the stock at $45. Your cost is $45,000. Thus your profit is $70,000-$45,000= $25,000. Not bad, huh?
Some people think that short selling stocks are counterintuitive. Well, it is not. You see, short selling stocks are just a method of profiting from a falling market. No doubt, many hedge funds have used short selling stocks to make huge killings alongwith making those companies bankrupt. Last year, there was a huge outcry by the companies against short selling stocks. SEC indeed had banned short selling stocks for some time. Infact a list of companies was issued whose stocks could not be shorted. But those were extraordinary times. The market was facing the crash of the century.
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