Guide to Short Selling Stocks

Guide to short selling stocks is a simple process, but making money by betting on their decline can be a bit more complicated. In this article, we’ll look at the basics of short selling and some of the advantages it can offer you in a volatile market.

When you sell short, you’re effectively borrowing shares from your brokerage. The idea is to repurchase them at a lower price, then return the borrowed shares to your broker and pocket the difference as profit. You also have to pay interest on the shares you borrow, so the overall cost can be quite significant.

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There are a few things that can prompt professional traders to short a stock. One is that they have reason to believe that a company’s performance is likely to decline. Another is that they’ve seen signs of accounting irregularities or problems with management that may lead to a share price drop. In addition, negative news about a company (such as a lawsuit) may trigger a short sale.

Despite the potential rewards, there are some significant risks associated with shorting stocks. One is that you could suffer unlimited losses if your forecast is wrong and the stock’s price rises. You’ll also incur extra expenses from the margin interest you pay to your broker, which can significantly reduce any profits you make on a short position. As a result, short selling is typically reserved for sophisticated investors with lots of research, deep pockets and a higher risk tolerance.