Results 1 to 5 of 5

Thread: Shorting stocks...how is it done?

  1. #1

    Join Date
    Dec 2010
    Location
    Eastern Washington
    Posts
    127

    Default Shorting stocks...how is it done?

    I've recently started buyng some stocks that I believe have the potential to go much higher from here. Now I realize that they will not make gains every day/week/month, but I would like to hold onto them for their dividend value. Selling every time I think they might go down and then buying again is not the best option simply because of the transaction fees I would incur.

    My question is this. How do I go about "shorting" a given stock in order to hang onto it but not lose too much during a downturn? I hear this term used all the time but can't seem to find a definition in plain english.


  2.  
  3. #2

    Join Date
    Sep 2007
    Location
    Almost Heaven
    Posts
    1,939

    Default Re: Shorting stocks...how is it done?

    From Investing for Beginners

    The Basics of Shorting Stock

    I own 10 shares of company ABC at $50 per share. You believe the stock price of ABC is grossly
    overvalued
    and is going to crash sometime soon. You are so convinced that the stock will crash, you come to me, and ask to borrow my ten shares of ABC and sell them at the current market price for $50. I agree to lend you my shares as long as you pay me back ten shares of ABC at some point in the future. You take the ten borrowed shares, sell them for $500 and pocket the money (10 shares x $50 per share = $500).The following week, the price of ABC stock falls to $20 per share. You call your broker and tell him to buy 10 shares of ABC stock, at the new price of $20 per share. You pay him the $200 (10 shares x $20 per share = $200). A few days later, you pick up the shares of ABC and bring them by my office. "Here are the ten shares I borrowed," you say as you put them on my desk.Do you see what happened? You borrowed my shares of ABC, sold them for $500. The following week, when ABC fell to $20 per share, you repurchased those ten shares for $200 and gave them back to me. In the mean time, you pocketed the difference of $300.
    The Speculative Nature of Shorting Stock

    What if the price of ABC stock had risen? The person shorting stock would have had to buy back the shares at the new, higher price, and absorb the loss personally. Unlike regular investing where your losses are limited to the amount of capital you invest (e.g., if you invest $100, you cannot lose more than the $100), shorting stock has no limit to the amount you might ultimately lose. Famed investor
    Ben Graham
    told us there is nothing stopping an overpriced stock from becoming more overpriced. In the unlikely event the stock had shot up to $1,000 (which actually happened to shares of Northern Pacific during a short squeeze in 1902), you would have had to purchase ten shares at $1,000 a share for $10,000. Taking into account the $500 you received from selling the shares earlier, you would have lost $9,500 on a $500 investment.Some investors practice shorting stock as a hedge to protect their portfolio. In most cases, this is not required nor recommended for individual or institutional investors. If you have selected a company you believe has excellent prospects for the next decade, you should view a declining market as an opportunity to purchase more of a good thing, not something to be dreaded.
    Shorting Stock in Your Personal Portfolio

    In order to begin shorting stock, you must open a
    margin account
    with your brokerage firm. You will be charged interest on the borrowed funds as well as subject to several rules and regulations that govern shorting stock (for example, you cannot short a penny stock, and before you can begin shorting a stock, the last trade must be an uptick or zero-plus tick.)
    Which one of you nuts has got any guts? -- Randle P. McMurphy
    ... stupidity will always find a way. -- Nnuut

  4.  
  5. #3

    Join Date
    Dec 2010
    Location
    Eastern Washington
    Posts
    127

    Default Re: Shorting stocks...how is it done?

    Ooookaayyyy... This makes much more sense now. Sounds like a little fish like me probably shouldn't worry too much about going through this process, especially if I stand to lose more than I might gain! Thanks Minnow, plain english and parables make this much easier too understand.

  6.  
  7. #4

    Join Date
    Sep 2007
    Location
    Almost Heaven
    Posts
    1,939

    Default Re: Shorting stocks...how is it done?

    Didn't mean to scare you away from making money on the short side, however; shorting does have its pitfalls. But so does the long side. Beginning investing usually makes more sense in picking a "winner" rather than a "loser." A sound investment strategy begins first and foremost with sound money management and proper risk assessment. That varies and depends solely on the individual investor when it comes down to it.

    There's plenty of money to be made on the short side but when you start trading on margin and using leverage without a sound money management strategy is where the investor sews the seeds of his/her own demise.
    Which one of you nuts has got any guts? -- Randle P. McMurphy
    ... stupidity will always find a way. -- Nnuut

  8.  
  9. #5

    Join Date
    May 2011
    Location
    Florida
    Posts
    1,215
    Blog Entries
    6

    Default Re: Shorting stocks...how is it done?

    Another way to short stocks while not needing a margin account, is investing in the reverse ETFs. While you cannot short specific stocks this way, there are plenty to chose from that will get you there. Any specific sector, any commodity... I don't care for margin, so it is my shorting method of choice.

  10.  

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •  
SPY (C Fund) (delayed)
Shorting stocks...how is it done?
(Stockcharts.com Real-time)
DWCPF (S Fund) (delayed)
Shorting stocks...how is it done?
(Stockcharts.com Real-time)
EFA (I Fund) (delayed)
Shorting stocks...how is it done?
(Stockcharts.com Real-time)
AGG (F Fund) (delayed)
Shorting stocks...how is it done?
(Stockcharts.com Real-time)

Yahoo Finance Realtime TSP Fund Tracking Index Quotes