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Stocks Education Shorting Stocks
Shorting stocks is a basic strategy taught by BetterTrades at its workshops in Atlanta. The concept of shorting stocks is opposed to the most commonly held stock market philosophy, which is "buy low, sell high." For the "buy low, sell high" concept to work, you want the stock to increase in value, which will provide you a profit. If a stock does not increase in value you will lose part of your investment.
Shorting stocks is a good strategy to use for a stock you believe will lose value on the market. The idea behind this technique, as taught by BetterTrades, is to buy a stock and hope the price goes down. You are actually pulling for the stock price to fall. You can actually make money, even if the stock price doesn't go up.
New BetterTrades students often have a difficult time grasping the concept of shorting stock, because it's so contrary to conventional thought. It's as simple as purchasing stock, but is done in reverse.
You must first identify a candidate that is losing value. Perhaps it is channeling and is heading down from a resistance level, a strategy taught by BetterTrades, or maybe it had a bad earnings report and is starting to take a tumble.
After deciding which stock to short, you simply go to the online brokerage house and begin the transaction. For this example, let's say you decided to short Atlanta-based Delta Air Lines, which hit a resistance level at $10 and you believe can drop as far as $6.
To short the stock, you instruct the broker to sell to open 100 shares of the stock at $9. Remember, shorting stock is the opposite from the "buy low, sell high" approach. You are actually selling stock you don't own to open the transaction, and then buy it back when the price is lower. In the example, if the price does drop to $6, you can buy back the stock for a $3 per-share profit, or a $300 gain.
There is a bad side to shorting stock, just as there is for buying stock. If you short a stock and the price goes up, you will lose the difference. If you sold to open at $9 and the stock went up to $12, you would then lose $3 for each share that was shorted, a $300 loss in the example.
BetterTrades wants its students to realize the biggest drawback in shorting stock is the unlimited liability. In the traditional buy-and-sell approach, a stock can only fall all the way to zero. But a stock has a potential unlimited ceiling on its upside. For example, if you short the stock at $9 and the company goes bankrupt and the stock is worthless, you've lost $9 per share. But if you short the stock at $9 and the company makes an earth-shaking discovering, the stock might rise to $200 overnight. In that case you would then owe $191 per share. While such a dramatic scenario isn't likely, it has occurred and must be considered when putting a plan on paper.
