Candlestick Trading Blog

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Short Selling Stocks in the Stock Market

Short selling stocks is a trading strategy used by traders who attempt to make a profit during a bear market. Shorting stocks is the opposite of what most traders practice day to day. Generally, traders make money through buying an asset, holding it as it appreciates in value, and then selling it to make a profit. Short selling stocks requires that the security’s value depreciates in order to make a profit. How does this work? Well basically, the investor anticipates that the stock will decrease in its share price, so he or she goes short instead of going long. An investor goes long when they buy stock and anticipate that the stock will increase in it shares price.

Here are the basics when short selling stocks. When the investor is selling short, he or she is selling stock that they don’t own. Instead of buying stock, your broker lends the stock to you and then the shares are sold. Since you are being loaned the stock, you are buying stocks on margin and you have to open a margin account. Your stock given to you by your broker comes from their inventory which typically includes stock from another firm, or from another customer. The shares are then sold and the proceeds from the sale are credited to your account. Eventually , you must buy back the same number of shares and return them to your broker. When short selling stocks, if the stock price drops, you can buy back the stock at a lower price, resulting in profit. However, if you were wrong and the stock rises, then you have to buy back to stock at the higher price and you lose money.

There are two reasons why investor prefer this type of stock trading. One reason this strategy is used is for hedging. Investors are protecting their other long positions by offsetting short positions. Additionally, short selling is used to speculate in an overpriced stock or market. As described above, this is a investing strategy used by traders to make money during a bear market.

Short selling stocks is a concept that many investors have a hard time with. It is not so much that it is overly complex, but that it is the complete opposite of what people think of when trading in the stock market. There are extremely high risks involved and there are restrictions on the size, the price, and the types of stocks that investors are able to short sell. Of course, however with high risk comes the potential for high returns. That is why each and every investor interested in learning how to make money by short selling stocks, must understand fully how the process works as well as the complicated process of short sell transactions.

Continue your education on the stock market, and research things such as the temporary short selling rules imposed this year and how that affected the stock market.