How to Short A Stock - A Quick SummaryEver wondered how to short a stock? This is a question that all day traders must know well since it has its uses especially when the stock market is down. With the recessions we have seen around the world and in other areas like Japan, shorting a stock can be an effective way to profit from day trading with little to no capital investment required.But you must never short a stock without knowing exactly what you are doing and getting into. Shorting stocks has its dangers including the loss of wads of money that you are not even prepared to lose in the first place. This is particularly true when the stock prices fall to zero when you expected the values to rise. Your first step in knowing how to short a stock is to adopt a technical analysis mindset and, thus, significantly disregarding whatever results are provided for by fundamental analysis. Your main focus in shorting a stock is on taking advantage of the stock market’s general trends, patterns and indicators – everything else including company status falls into the background. So, what does shorting stock mean exactly? It is the selling of shares that the seller does not own but these shares are promised for delivery at a future time. As the seller, you will be borrowing these shares from your stockbroker who, in turn, will secure these securities from the company’s own inventory, from one of the company’s customers, or from another firm. When the shares are sold, the proceeds are credited to your account. (The process of how to short a stock is, indeed, easy when you come to think of it) You are then required to “close the short”. This means purchasing back the same number of shares and then returning these stocks to the broker. Where do the profits and losses come in? Well, when you buy back the stocks at a lower price, you make a profit. But when you buy back the shares at a higher price, you just lost money. Plus, you must also pay the true owner of the shares any and all dividends, rights and benefits that have accrued during the lending period. To give a concrete example of how to short a stock: I am the present owner of 100 shares of XYZ Corporation shares valued at $50 per share. Due to your market analysis, you are firmly convinced that the stock market will crash in the next few days but you still want to make a profit despite the downward movement. You will then borrow my 100 XYZ Corporation stocks, sell these securities for $50 and then pocket the $5,000 proceeds. We have an understanding that these 100 shares will be repaid at a future date. In the following week, the market values of the shares have decreased to just $20 per share. You will then buy 100 shares for $2,000 and repay these securities in my account. You have just pocketed the gross amount of $3,000 – fees and taxes will still be deducted from the amount. Indeed, it is easy to know how to short a stock. The key to being successful at it is to have a trading plan – how to analyze the market, when to sell and when to buy the stocks – but that’s for another article.
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