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What Is "Shorting" a Stock? Bookmark

This gets a bit funny sounding, but it is a tactic that we as traders use very frequently. You will have the ability (once you open your brokerage account) to sell a

This gets a bit funny sounding, but it is a tactic that we as traders use very frequently. You will have the ability (once you open your brokerage account) to sell a stock you don't even own, and the money for the sale will show up in your account!! What's this, you say? Sell something I don't even own? Yes, and here is how it works: Suppose you think the XYZ company is going to fall like a rock today. You can literally call your broker and say, "I would like to sell 300 shares of XYZ short " and the broker will then place an order to sell 300 shares of XYZ. Let us assume XYZ is selling for 50 dollars per share. What is happening is that the broker will "lend" you the 300 shares of XYZ to sell. So in a few moments you find out that you have just gotten 15,000 dollars in your account. Now if you are correct and XYZ does indeed fall, you simply buy it back on the open market and give it back to the broker who loaned it to you. This is called covering your short. So now let us assume XYZ fell to 46 dollars over the course of a few days. You buy it back at 46 and the difference between what you sold it at (50) and what you replaced it at (46) is your profit. This is a very handy tool and is the sole reason that we as traders can make money whether the market is going up OR down. The key of course is being right on your assumption that XYZ is going to fall, or you will end up having to buy it higher than you sold it for the purpose of replacing it with your broker. At the beginning of your trading career it is best to concentrate on "going long" or in other words buying stocks with the assumption they are going to rise, but as you become more experienced you will certainly want to start "shorting" stocks.

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