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Stock Trading Profits From Selling
Stocks Short
By Carl G. Robertts
Selling “short” on a stock is a risky proposition, in which you
essentially bet that you can sell stock that you don’t own yet,
but which has been promised to you, at a price higher than
you’ll be able to purchase it for, in order to make a
profit.
To a stock-market neophyte, this may sound ridiculous; how can
one sell something one does not yet own? However,
short-selling, while an advanced concept, is actually quite
simple to understand, once it has been put in plain words.
What happens is that your stockbroker has stock available,
whether from his own personal investments, or another customer,
which he lends to you. The shares are sold in your name, and
the proceeds are put into your account – but then you must
purchase the same number of shares of the same stock, and
return them to the broker, at a slightly higher cost than that
at which he lent them to you.
Essentially, it’s loan of stock which must be repaid, with
interest – whether you actually make a profit or not. If you
are able to repurchase the shares at a lower price than that at
which they were sold, you win your bet; but if the price rises
instead, you lose. Usually, a “short” can be held for as long
as is necessary to make a profit; however, if your broker needs
the stock returned suddenly, you can be forced to buy back the
shares that you sold, regardless of the price. If your broker
overextends himself – which is unfortunately easy to do – you
may find that he will put pressure on you to make the purchase
before you’re ready.
Clearly, while the opportunity to profit in short stock trading
is attractive, there are several risk factors of which you
should be aware.
First, stock prices, in general, typically tend to go up – not
down. You are taking the chance that a particular stock will
“buck” this trend. If it doesn’t, you’ll show a loss, not a
profit.
Second, you need to remain aware at all times that you are
borrowing stock – and, therefore, money – and that you can, in fact, lose more than you put
in on the deal. Many people overspend with their credit
cards; the same is unfortunately true of short-sell stock
deals: convinced that they’ll be able to make a profit and
pay off the loan, people tend to oversell – and
occasionally are unable to make good on the debt.
Third, if a particular stock is being short-sold by a number of
investors, and they all sell their shares at once, it can force
the price to go higher than expected, making the repurchase
more expensive for everyone, and causing you a loss. There is
no way to know how many people are planning to sell a
particular stock short.
However, if one is aware of the risks, and is careful not to
gamble with more than one can afford to lose, selling short can
be a profitable experience.
If your tolerance for risk is broad enough
to encompass the chances involved with selling short, it can be
an excellent way to to boost your stock trading profits – if
you have the know-how. However, it is an advanced concept, and
if you are new to investing, it may be better to leave
short-sell trades alone until you have more stock trading
experience.
About the Author: Get the inside scoop with our no cost
stock
trading report. Grab your copy at http://www.StockTradingReview.com
today.
Source: www.isnare.com
Permanent Link: http://www.isnare.com/?aid=295893&ca=Finances
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