I m new to the Stocks, How do I short a Stock?
I can tell you how but I’d rather yod didn’t do it because it’s too risky. After I explain how to do it and why it’s too risky I will explain a better way to profit by the drop in a Stock.
To short a stock you must have enough money to buy the number of shares you plan on selling short, plus you must have enough in the account and get the broker’s approval – believe me, it’s not that easy. A brokerage will then borrow those shorted stocks from someone who owns them and you have a short position, for which your account will be credited the amount of the shares at the price the stock was trading when shorted, less commissions. Hopefully the stock will go down and you profit by that decrease (in the case of a short, down is good). Your percentage profit is calculated by taking the price you bought the shares back when closing the position as the cost per share basis (with commissions added to the cost of course). The profit percentage is: closeout price minus Original short sale stock price, divided by closeout price, or (L-S)/S. I have deliberately used L and S to give you the sense of S=short, L=long or closeout. But your Short Position, as it is called, can be closed against your will by the brokerage, especially if your position is going against you (stock going in the wrong direction for you – UP), even if you are vindicated in the long run and the stock does drop eventually – after your position has been closed.
Now let me explain the real reason why this is such a bad strategy. If the company you have shorted has announced a killer new business plan, that stock will go up fast against you and you will lose so much money by it going against you that theoretically there is no limit to how much you can lose – it could be 500 to 1,000 times the money you received in the first place. Say, for example you had sold short $20,000 each worth of Google, Ebay and Chicago Mercantile Exchange in 2002. By now you would have lost OVER ONE MILLION DOLLARS. Never forget that an expensive (in your opinon) stock can still go up, while a cheap crashed stock can still go down. The Market DOES NOT CARE that you will be hurt – IT DOES WHAT IT WANTS WHEN IT WANTS TO!
A better way to do what you are trying to do is to buy options – in this case, a PUT. This gives you, as the owner of the PUT the right, but not the obligation, to sell (PUT to the Market) the stock at the original price, then profiting by the decline, so once again DOWN is GOOD for you, the owner of the PUT. Why would this PUT option limit your risk? Because you can only lose 100% of your option’s price if the stock goes way up (as little as 3-400 dollars per hundred shares or ONE PUT CONTRACT), instead of the theoretical Million $ spoken of earlier. But if the stock truly goes to zero, you will have made the difference between the stock price when you bought the PUT and the stock crashing to zero, that is, selling it at the PUT’s strike price (say $250 a share). So suppose you had bought Enron PUTS in 2000. You would have made a lot on the crash by buying the PUT option; yet if Enron had never been a bad company and had never had a scandal, its stock by now would most likely be worth at least 6 or 7 times what you got when you "sold" it short. Follow me? By using the PUT, if you are entirely wrong, you just lost the premium you originally paid, but did not have to pony up many thousands if not hundreds of thousands of dollars to "cover your shorts" as they call it. So the PUT limits your risk while letting you participate in the drop IF it happens.
IF you decide to get more education in this area a word of caution: treat options with care. If you have X dollars to invest, never let an option position exceed 2-5% of that theoretical X – it is like having 98% margin on a stock and having a horrible loss on a slight move in the wrong direction. So by limiting the position size, if an option position goes to zero, this 100% loss on a very small percentage of your assets will hardly be noticed. Options are like spice – stocks are like meat and potatoes.
Hope this helped.
I can tell you how but I’d rather yod didn’t do it because it’s too risky. After I explain how to do it and why it’s too risky I will explain a better way to profit by the drop in a Stock.
To short a stock you must have enough money to buy the number of shares you plan on selling short, plus you must have enough in the account and get the broker’s approval – believe me, it’s not that easy. A brokerage will then borrow those shorted stocks from someone who owns them and you have a short position, for which your account will be credited the amount of the shares at the price the stock was trading when shorted, less commissions. Hopefully the stock will go down and you profit by that decrease (in the case of a short, down is good). Your percentage profit is calculated by taking the price you bought the shares back when closing the position as the cost per share basis (with commissions added to the cost of course). The profit percentage is: closeout price minus Original short sale stock price, divided by closeout price, or (L-S)/S. I have deliberately used L and S to give you the sense of S=short, L=long or closeout. But your Short Position, as it is called, can be closed against your will by the brokerage, especially if your position is going against you (stock going in the wrong direction for you – UP), even if you are vindicated in the long run and the stock does drop eventually – after your position has been closed.
Now let me explain the real reason why this is such a bad strategy. If the company you have shorted has announced a killer new business plan, that stock will go up fast against you and you will lose so much money by it going against you that theoretically there is no limit to how much you can lose – it could be 500 to 1,000 times the money you received in the first place. Say, for example you had sold short $20,000 each worth of Google, Ebay and Chicago Mercantile Exchange in 2002. By now you would have lost OVER ONE MILLION DOLLARS. Never forget that an expensive (in your opinon) stock can still go up, while a cheap crashed stock can still go down. The Market DOES NOT CARE that you will be hurt – IT DOES WHAT IT WANTS WHEN IT WANTS TO!
A better way to do what you are trying to do is to buy options – in this case, a PUT. This gives you, as the owner of the PUT the right, but not the obligation, to sell (PUT to the Market) the stock at the original price, then profiting by the decline, so once again DOWN is GOOD for you, the owner of the PUT. Why would this PUT option limit your risk? Because you can only lose 100% of your option’s price if the stock goes way up (as little as 3-400 dollars per hundred shares or ONE PUT CONTRACT), instead of the theoretical Million $ spoken of earlier. But if the stock truly goes to zero, you will have made the difference between the stock price when you bought the PUT and the stock crashing to zero, that is, selling it at the PUT’s strike price (say $250 a share). So suppose you had bought Enron PUTS in 2000. You would have made a lot on the crash by buying the PUT option; yet if Enron had never been a bad company and had never had a scandal, its stock by now would most likely be worth at least 6 or 7 times what you got when you "sold" it short. Follow me? By using the PUT, if you are entirely wrong, you just lost the premium you originally paid, but did not have to pony up many thousands if not hundreds of thousands of dollars to "cover your shorts" as they call it. So the PUT limits your risk while letting you participate in the drop IF it happens.
IF you decide to get more education in this area a word of caution: treat options with care. If you have X dollars to invest, never let an option position exceed 2-5% of that theoretical X – it is like having 98% margin on a stock and having a horrible loss on a slight move in the wrong direction. So by limiting the position size, if an option position goes to zero, this 100% loss on a very small percentage of your assets will hardly be noticed. Options are like spice – stocks are like meat and potatoes.
Hope this helped.
References :
Traded for the last 35 years: a lot in stocks and options and a little in the Futures markets.
first you need to get margin on your account. than you can short a stock, which is pretty much borrowing a stock till it drops down and you buy the stock at that price. The difference at which you borrowed the stock from which you bought the stock is your profit.
References :
Open a margin account. (You need at least $2,000.00 USD)
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