Shorting A Stock

Apr 11, 2021

Stock101

Have you ever wondered what is wrong with the stock market? Why do retail investors invest heavily into a bad company to pump it ‘to the moon’?

In the stock market, there is a term known as Short selling. While the traditional method of buying stocks believes that it will increase in value, some stocks are almost certain to reduce. Perhaps due to much debt, bad management, or a worse earnings report, stocks go down. Shorting a stock is predicting a stock will go down and earning the difference between the original price and the price at the dip.

Example: If company A’s share price is $100 and company A despite having so much short term debt, had a very disappointing quarterly earnings report, most long term investors avoid it- but not a group of people called Short Sellers. If you short 50 shares of Company A, you will be given $5,000 ($100 * 50shares). If the price drops to $80, and you close the position, it means you will buy the 50 shares back at $80 per share (total is $4000). The $1000 difference is your profit. If, for instance, the stock price reduces to $40, and you close the position, you’ll be buying the 50 shares at $40 each (total is 2,000). The difference of $3000 is your profit.

Shorting a stock is very risky. The highest you can gain is if the stock price goes down to Zero, while in normal investing, the prospect of returns is endless. And should the stock price increase, you would have to pay the difference if your broker declares a margin call (when you have made losses beyond what your broker can bear).

Recently, shorted stocks are being placed under intense squeeze by retail investors. A squeeze is when a shorted stock is under increased demand. Basic laws of economics say the greater the demand, the higher the price. This causes the stock price to increase, thereby choking shorts sellers. Stocks like GME, AMC and CLOV are a few of the stocks being pumped by retail investors.

To short a stock, you will need to have a margin account with your broker. You will also need to take necessary requests to them to short stocks.

Stock Shorting is not an advisable investment technique. While you can make money in the short term, you can also lose everything to the last drop of your sweat if your shorted stock is squeezed. Because of the risk, we do not recommend it to newbies as an investment technique.

Before you decide to short a stock, would you like to see which stocks Horao believes will give you good returns on your Investments? Click Here

Tags :

shorting,stock,stock market