It’s one of those terms that has been thrown around Wall Street for years, though with little understanding, but simply what is short selling?
Disclaimer: We at MyWallSt in no way endorse short selling. Some people make a lot of money doing it, but really, it’s something that should be left to the speculators and day traders. This chapter is purely to educate you on the practice.
Just like you can invest in a company and make a return when the value goes up, you can bet against a company and make money when its value declines. It’s called short selling.
To do this you’ll need a margin account with your broker (we already warned you not to get one of those), as technically you could incur unlimited losses.
When you short sell, you borrow a stock from your broker using credit. If the stock price drops 10%, you can then buy the stock at the lower price and make a profit on the difference. If the stock price goes up, however, you may be forced to buy it at the higher price to pay back the owner.
Since the lowest a stock price can go is zero, when you buy a stock, the most you are going to lose is the money you’ve invested. When short selling, there is no limit to what you could lose, as the price could continue to rise indefinitely.
When you short a stock you are not entitled to any dividends or shareholders rights, as you are only borrowing the stock. To further complicate things, if demand for the stock goes up, your broker can force you to return it if the original owner wants to sell. So even if the price has gone up, but you still expect it to drop, you might have no choice in holding onto the stock and be forced to incur a loss.
- Just like you can bet on a stock rising, you can bet on it declining.
- This is called short selling or shorting.
- Technically short selling can lead to unlimited losses.
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