Read This Before Shorting a Stock

It’s possible to make money in the market no matter which way it moves—up, down, or sideways.

What Is Shorting a Stock?

Shorting a stock is a way for investors to make a bet that the future share price of a particular stock will be lower than its current price.

Example of Shorting a Stock

Let’s say an investor found a company that they think is overvalued. They borrow 100 shares of stock in company A at a price of $10 per share for a total of $1,000 (plus any applicable brokerage fees). In scenario A, the investor made a prediction that was spot-on and the price falls to $9 per share. Great! Now the investor can buy back 100 shares at a price of $9 for only $900, and the leftover $100 is the profit.

What Is a Short Squeeze?

A short squeeze refers to the rapid flight of short sellers from stock in order to limit losses–a situation that leads to a dramatic surge in the stock’s price.

Why Is Anyone Interested in Shorting a Stock?

•  The hope of making fast profits •  Seeking potential returns during a stock market crash •  As a hedge against long positions

Example of Shorting to Hedge

For example, say someone has 100 shares of stock in a company that deals in real estate and is classified as a real estate investment trust (REIT). The investor has researched the company and believes it has sound fundamentals, high-quality management, and will continue to grow.

Is Shorting a Stock Wrong?

The practice of short-selling is not without controversy. Shorting may have received a bad rap by being associated with the fear that shady investors will spread malicious rumors about a company in the hopes of influencing its share price.

How Does Shorting a Stock Work?

Here are some ways investors might establish short positions: •  Margin accounts •  Put options •  Inverse ETFs

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