Shorting Stocks Explained
Most people know that you buy stocks and wait for a price appreciation to take place in order to make a capital gain. Can you make a capital gain when there is price depreciation in your stocks? Many beginning investors get confused when they realize that it is possible to make money when the stock falls in price. In practice, shorting a stock is as easy as buying stocks once you get hang of it. When the market is falling, investors sell short a stock with the goal of profiting from the fall in the price of that stock.
The difference between the selling price and the buying price in case the price goes down is your profit. When you short a stock, you borrow it from your broker and sell it with the intention of buying it back at a lower price in the near term future and returning it to your broker.
You are anticipating further fall in the price of the stock when you short a stock. When the price of a stock goes down, you make profit. However, if the price of the stock instead of going down starts to go up, you get a loss.
Many people are afraid of short selling stocks. They are right to some extent. Theoretically a stock price can go up and up making your loss as big as infinity. In such a scenario, your loss can be infinite. So shorting a stock without proper risk and money management is not wise. However, before that happens most probably you will receive a margin call from your broker that leads to a forced sale before your losses reach unmanageable proportions.
Some people are against the strategy of shorting stocks. In the stock market crash of 2008, many financial companies went bankrupt due to the short selling of their shares by the speculators. A temporary ban was put on shorting for sometime during that period.
In swing trading, we are simply looking to profit from the ups and downs of stock prices. When the price of a stock goes down, short selling is the best swing trading strategy. However, the goal of short selling is not to drive the price of a stock to zero and put the company out of business.
One reason why swing traders love short selling is due to the velocity of the moves! Negative news like poor earning, credit rating downgrade or a poor product launch can bring down a stock price in a matter of minutes and wipe out the steady gains made in months.
Short selling is an integral part of options writing. Short selling is also used in portfolio risk management. Shot selling can be a good hedging strategy for long term investors too. So if you a long term investor, you can lessen the impact of the sharp price drop on your portfolio by using a short selling hedging strategy. Swing traders always look for big winners and this brings them to the short side of the market. When the price of a stock starts to fall, chances are it will fall more before the market stabilizes and the price starts to rise again.
Mr. Ahmad Hassam is a Harvard University Graduate. Try This Cash Printing Forex Signal Service From Heaven! Learn Swing Trading!
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