Candlestick Trading Blog

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Short selling stocks is done for a couple of reasons. For starters investors aim to profit from a stock's decline in value and secondly investors are able to increase the value of their portfolios during a bear market. Typically investors will buy stock believing that the price will rise in the future, or in other word, go-long. Conversely, when an investor goes short, that means that he or she anticipates that the value of a stock or share is going to decrease. When selling short the trader actually sells a stock that he or she doesn't even own! Rather than buying the stock, the investor instead promises to deliver the security.

There are two main reasons that stock traders look to begin selling short. The first reason is to hedge. In fact, the majority of short sellers use shorts to hedge. Basically they use short sales to protect other long positions. This is an investing strategy that is very sophisticated and it takes real dedication and focus to pull it off, however it can be done. The second reason that traders practice short selling is to speculate. Traders will speculate in attempts to profit from an overpriced stock or an overpriced market.

There are many additional reasons that sophisticated traders choose to sell short. For instance, it can provide you with an investment portfolio that is low in volatility since it includes both long and short positions that tend to move together. Also, a lot of institutions won't participate in shorting stocks which leaves opportunities for others to benefit from. There are also investors who are better at identifying companies that are bad and overpriced instead of companies that are good and undervalued. Additionally, keep in mind that good news is more available to investors than bad news. This means that the bad news may not yet be completely factored into the price current stock price. This provides a great opportunity to those investors that understand the entire basis of short selling. Investors however must keep in mind that if a stock is overpriced, it has the potential to become more overpriced! This means that you at some point would have to buy it to cover your position. Also, when you are selling short, you are not just making an educated guess on what the stock is worth, you are also making an educated guess as to what the stock market will be willing to pay for the stock in the future.

Keep in mind that there are some restrictions involved with short selling. Investors cannot short sell penny stocks for starters and most short sales have to be done in round lots. Investors must be sure to follow the rules and regulations set by the "Regulation SHO." If you are unsure of what these rules are and you wish to begin shorting stocks, be sure to continue to do your research.

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