What’s this method about?
Short selling stock is a strategy used by many investors that allows them to trade shares from stocks they don’t currently own.
Who wouldn’t want to have such an opportunity?
The more opportunities a penny stock trader can have the better the chance of making profits. Trading penny stocks is very tough, if you’re new to this then you’ll have a lot to learn.
You don’t want to start trading your money not knowing what you’re doing first.
How does short-selling stock work?
In short selling, a stock trader would borrow shares from the broker and sell them for a certain price in the hope that the price will go down.
Once the price of the stock does go down then it will be bought by the stock investor to be returned to the broker.
This way profits are made and the broker also makes profits through its fees for this type of service.
However, in some circumstances you may lose your money while brokers are making sure they don’t lose their capital.
Although it sounds like a very good method, it does have some cons which you should be aware of.
In fact, I’d be very surprise or suspicious if there were not any cons after everything we know about stock trading.
Keep reading and I’ll share everything you need to know pertaining to short-selling stock.
How can you start?
In order to short sell a stock, you’ll need to have a margin account. The regular brokerage account can’t allow you to short sell.
According to the U.S Securities & Exchange Commission,
A “margin account” is a type of brokerage account in which the broker-dealer lends the investor cash, using the account as collateral, to purchase securities. Margin increases investors’ purchasing power, but also exposes investors to the potential for larger losses.
Most stock brokerage requires at least $2000 in your account in order to be eligible for margin. Once you’re accepted you’ll notice that your buying power has doubled, which is the good part of margin accounts.
It’s a good idea to find out if the brokerage offers margin accounts before you register with them because not all of them do.
Furthermore, you don’t want to pay too much in fees. Look for the ones that will not charge you too much as this service is not free of charge.
Once your account is opened you can start trading right away, but I would not advise you to do so until you know how it really works and have a clear plan on how to manage it.
How is short-sell traded?
It’s basically the opposite of trading a long position. In short trading, investors borrow the shares from a broker and sell them at a higher price hoping the stock price will fall, so they can buy them back at the lower price and make a profit.
unfortunately, shorting stocks theoretically has an unlimited risk of loss since there is no cap on the price of a stock.
When short-selling, you’re looking for stocks that may have been affected by some events and you think that their current price will go down.
Again, you’re working on the opposite of a long trading position. For example, let’s say ABC stock is trading at $5.00 a share and their recent quarter release is very low compared to what they were expecting.
It might be an opportunity to short ABC stock because there’s a good chance that its current price will go down in the next few hours.
What’s the main purpose of short-selling stock and what are the dangers?
It’s plain and simple, the primary purpose of selling short is to take advantage of short-term opportunities in stocks or other investments whose prices you anticipate falling.
However, that does not protect you from the usual inevitables in stock trading. Shorting even asks more from you mentally, or even financially if things don’t work in your favor.
The main danger of shorting a stock is that there’s a possibility that it will increase in price instead of losing value, which is the total opposite of what you were looking for.
Furthermore, there’s no theoretical cap on the amount that a stock’s price could increase, and as a result, a short position could lose a limitless amount of money.
This sounds crazy, right? Yet, it’s something to keep in mind when short-selling stock. Better yet, it’s something you should think about first before you even start.
Because once your trade goes against you there’s no way around losing some of your capital. I know it sucks but it’s a potential reality that you’ll have to be ready to confront head-on.
To make things worse, margin is also involved in shorting. In the event that the stock price rises, this may put a short seller at risk of receiving a margin call.
A margin call is a warning that you need to bring your margin account back into good standing. You might have to deposit cash or additional securities into your account, or you might need to sell securities to increase the ratio of assets you own entirely to the amount you borrowed.Forbes Advisor
A short seller would be required to add more money to the account in order to supplement the initial margin amount in the event of a margin call.
And what I really dislike about margin is the fact that they can sell your position if the stock lost a specific percentage of its value.
Most of the brokerages set it a 25%, and once you’re down this percentage your position is set to be sold, which means that you’ll automatically lose your money.
Short-selling stock is not a strategy that should be taken lightly, although it’s not difficult for a trader to place a short trade, the risk is extremely high.
Therefore, if you’re not someone who knows how this thing works really well, it’s best that you trade the regular way so you can be able to control your risk in a more manageable way.
However, you’ll still have to always do your due diligence to be sure that you survive in this market.