Short Selling
Conclusion
Short selling is another technique you can add to your trading toolbox. That is, if it fits with your risk tolerance and investing style. Short selling provides a great opportunity with a high degree of risk. We hope this tutorial has enabled you to understand whether it's something you would like to pursue. Let's recap:
- In a short sale an
investor borrows shares, sells them, and must eventually
return the same shares (cover). Profit (or loss) is made
on the difference between the price when the shares are
borrowed compared to when they are returned.
- An investor makes
money only when a shorted security falls in value.
- The shorter must
pay the lender any dividends or rights declared during the
course of the loan .
- The two reasons for
shorting are to speculate and to hedge.
- There are restrictions
as to what stocks can be shorted, and when a short can be
carried out (uptick rule).
- Short interest tells
us the number of shares that have already been sold short
in a security.
- Short selling is
very risky. You can lose more money than you invest but
are limited on the upside.
- A short squeeze is
when a large number of short sellers try to cover their
positions at the same time and thus, drive up the price
of a stock.
- Even though a company
is overvalued, it may take a long time for it to come back
down. Fighting the trend almost always ends up with trouble.
- There are some that
see short selling as unethical and bad for the market.
- Short selling contributes
to the market by providing liquidity, efficiency, and acting
as a voice of reason in bull markets.
- Some unethical traders
spread false information in an attempt to drive the price
of a stock down and make a profit by selling short.
See also:
"Short Selling a Stock " – Disnat Bulletin, July 2006
"Mastering Short Selling" – Disnat Bulletin, November 2003
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