Candlestick Trading Blog
August 7, 2009
Sell Short
| In order to learn to sell short you must first understand the basics of trading stock. Some think that short selling is confusing at first, but once they understand it they find it very useful and not as complex as they originally thought. In today's article we discuss some of the risks involved with selling short for those investors looking to participate. Keep in mind however, while there are risks involved, the benefits of selling short make it worth while as long as you know what you are doing and you trade with discipline and focus. To sell short means to bet against the overall direction of the stock market. Over time stocks typically go up and appreciate in value. If it doesn't do so on its own, the stock price usually raises a small amount due to inflation. When selling short you must be sure that you don't hold positions open for a long period of time. That can be very risky since again you are betting against the overall direction of the market. There are no limits on how much you can lose when shorting stocks. When buying and selling stock in the traditional sense your upside is limited because your stock cannot go below zero. When shorting stock, in theory the stock price has no limits to how high it can go. It is considered risky because you can actually lose more than your original investment. That is why it is extremely important that you have a clear understanding of what you are doing when short selling stocks. Margin trading is a part of short selling. You must have a margin account in which you actually borrow money from your broker in order to sell short. This margin account requires that you meet a minimum balance and if your account dips below that amount you will get what is called a "margin call." This margin call requires that you add more money to your account or you can also liquidate. This is considered risky because you are borrowing money and using your investment as collateral. There is a phenomenon known as a short squeeze that occurs as a result of short selling stocks. This occurs when stocks prices increase and sellers' losses also increase. The sellers then rush to buy the stock so that they can cover their positions. As a result of the now high demand for the stocks, the stock price is driven up even further. There are risks to short selling just as there are risks to stock trading in the more traditional sense. The important thing is to ensure that you are educated about the stock market and about the strategies that you use to short sell. Online Stock Market Reviews presented live via the internet by Stephen Bigalow |
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