Short Selling

Short selling is the sale of a stock that you don't own, with the expectation that it will decline in value. The idea is that you can buy it at a lower price and ideally capture the differential in price, thereby leading to a potentially profitable trade. It is a strategy to consider when you feel bearish about a stock. It is not, however, a strategy endorsed or recommended by BetterTrades due to its risk profile.

There are similarities and risks in common with short selling and buying stock, even though short positions are the opposite of long positions.

Example

Suppose you sell short 100 shares of stock at $50 each. If the stock drops all the way to $40 a share, you will profit $10 a share, or $1,000, less commissions. The risk is if you sell short the stock and it rises to $60 a share, you will lose $10 a share, or $1,000 plus commissions. When shorting stock, the expectation is that the stock will decrease in value.

Note

Remember, a stock can only fall to zero, but it can conceivably rise to an infinite level. That means you have limited gains, but potentially unlimited losses if the stock keeps going higher and higher, which is why it is not a strategy endorsed or recommended by BetterTrades. Short sellers are also responsible for paying dividends to the holder of the stock that they are borrowing it from. Many large institutional funds have covenants against short selling because it is essentially a bet against the company's value.

Short Selling | Candlestick Charting