Short Selling Stocks to Take Advantage of Market Declines
Short selling (also known as shorting or going short) is the practice of selling a borrowed stock, and hoping the share price will drop soon so that you can buy it back for a profit. It is a way to take advantage of market down trends or recession that can provide you with an opportunity to make profitable trades in the stock market.
The only way you can profit form going short is if the stock continues to fall after you initially enter the trade. Conversely, you will incur a loss if the price of the stock continues to rise and move higher because you need to buy it back at a higher price than you initially sold them for.
For instance:
The shares in Company PPC is currently trading at $6. As a short seller, you borrow 200 shares of Company PPC from your broker and sell them immediately for a total of $1,200 ($6 * 200). Later, the price of shares drops to $4 per share, you quickly buy them back for $800 ($4 * 200 shares) and return them to the broker. As such, you will make a profit of $400 ($1,200 - $800), before deducting any borrowing fee or commission.
* Next: How To Sell A Stock You Don't Own
The only way you can profit form going short is if the stock continues to fall after you initially enter the trade. Conversely, you will incur a loss if the price of the stock continues to rise and move higher because you need to buy it back at a higher price than you initially sold them for.
For instance:
The shares in Company PPC is currently trading at $6. As a short seller, you borrow 200 shares of Company PPC from your broker and sell them immediately for a total of $1,200 ($6 * 200). Later, the price of shares drops to $4 per share, you quickly buy them back for $800 ($4 * 200 shares) and return them to the broker. As such, you will make a profit of $400 ($1,200 - $800), before deducting any borrowing fee or commission.
* Next: How To Sell A Stock You Don't Own