You know all about buying low and selling high, right? Did you know you can also make money by reversing that? Sell high and then buy low...
You know all about buying low and selling high, right? Did you know you can also make money by reversing that? Sell high and then buy low, and you’re engaging in “shorting.”
You might do that when you expect a certain company’s stock to sink. So you call your brokerage and say that you want to short the stock. The brokerage will “borrow” shares from a company shareholder’s account and sell them for you. Then, assuming the share price does drop, you’ll later “cover” your short, buying shares on the market at a lower price to replace the ones you borrowed. If you shorted the stock at $50 and covered when it fell to $40, you made $10 per share (less commissions). This technique may sound weird, but it’s legal and done often.
Shorting can be beneficial because with shorts in your portfolio, you might profit from any kind of market.
But shorting has a big downside, too. If the stock price rises, you lose. With shorts, you can earn only up to 100 percent, since a stock price can’t fall lower than zero.
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But if your short keeps rising (going in the wrong direction), your downside is theoretically unlimited. Since you can actually lose more than 100 percent of your money, you need to keep a very close eye on any shorted stocks.
— The Motley Fool