Stock Shorting Guide
If you believe that a company’s shares are overvalued, you can borrow them from your broker and sell them to make money when the stock price falls. This is called “short selling.” It can be an effective strategy for reducing the overall risk of your portfolio, but it’s also risky and comes with many costs.
You need a margin account with your brokerage firm to do this trade. This is because you’ll be selling borrowed shares, which leaves your account with a negative number of shares (in what is known as a short position). You also need to pay interest on the debt, which is typically a few percent per year, though it can be much higher for heavily-shorted stocks.
Stock Shorting Guide: How to Profit from Declining Prices
Stock Shorting Guide, you need to identify which stocks are shortable. These are usually broadly traded, low-priced stocks with plenty of available shares. Next, you need to determine the key factors that could cause the stock to move in your favor. For a Long recommendation, this should be 2-3 key events or potential events in the next 6-12 months that will cause the market to realize this pricing imperfection and correct it.
Finally, you need to place a sell order and wait for the stock to decline. Then, you need to close out the position and buy back the shares that you sold short at a lower price. This can be tricky, as the longer you’re short a stock, the more it will need to fall in order for your gains to offset all of your trading costs.