You may have heard of the old expression that the only way to make money in the stock market is to buy low and sell high. Sell the stock you do not own – short sell
While this is mostly true, the often overlooked alternatives use the same words only in a different order; What is this short selling, but how does it work and what is dangerous and could be disastrous for your portfolio?
How Short Selling Works
A short position in a stock is to sell a stock and you do not currently have a position. This type of transaction is carried out in the belief that the price of the stock will fall. So imagine that you believe the stock price of company Z will drop from $ 10 to $ 6, so you want to reduce the stock. You can contact your investment advisor or brokerage firm to inform them that you want to reduce the stock. The company will then lend you stock, which you will sell directly to the market and receive the proceeds from the sale of the stock. However, your account must have a minimum amount (margin) to allow transactions to occur.
As a discerning investor, short-term trading returns, shares fall to $ 6, "Short." This is a Wall St. term used to repurchase your initial stock. Because you buy the stock ($ 6) for less than you sell them at ($ 10), you get to keep the spread. You do not keep stocks because they just lend to your brokerage firm. Brokerage companies will charge interest on stock loans, which is how they make money on the deal. When a short position is covered, you will profit.
A margin used to determine the minimum amount of margin that you need to have in your account when you hold a short position in the stock. To cover up the risk in this case, even though the customer must provide more than the total value of the short sale. The following is a list of maximum short positions for short positions:
Stock Price … Maximum Loan
$ 2.00 and above … 150% loans
$ 1.50 to $ 1.99 … $ 3
$ 0.25 $ 1.49 … 200% Loan
$ 0.24 and below … 100% Loan + $ 0.25 per share
The risk of short selling
While there is a huge money making from the down market by shorting Opportunities, there are considerable risks to consider before starting a short-term deal. Here are a few:
– The potential for unlimited loss. When your stock, you can lose up to 100% (if the stock goes to $ 0). However, when stocks are short, prices can rise indefinitely, so you can afford unlimited amounts.
– It is difficult to find enough stocks to make up for short selling (thus prolonging your losses if it is in the wrong direction).