How you can make money as a stock falls:
If you invest or trade you might have heard of shorting a stock or selling a stock short. But how do you short a stock and what does shorting a stock actually mean? Both are questions that anyone who wants to make money in stocks should know and we answer both of them below.
Whether you are new to the stock market or have years of experience you might not fully understand the process of shorting a stock. Anyone can be profitable when a stock rises in price simply by owning the stock. When the market changes to bad and stocks are no longer rising the great investors make money as a stock falls in price. One of the most common ways to do this is to short a stock. In this article YP Investors will go through the complete process and meaning of shorting a stock step by step to help grow your financial knowledge.
Being Long a Stock Simply Means Owning a Stock
First let’s start with being long a stock. When someone is “long” a stock this simply means they are purchasing shares of that stock and holding them. When long a stock you are expecting the prices to rise because you make money as the stock prices go up. Ideally you would buy in at a lower price then you end up selling it, this results in a profit. Going long in a stock is what the majority of investors, traders, and financial institutions do.
Your Profit Goes Up While the Stock Price Falls
When you short a stock you are making money as the stock’s price falls. So how do you short a stock? The general idea is to sell shares of a stock and then buy them back at a lower price. First you are going to borrow a number of shares of a specific stock and then sell those borrowed shares at a specific price. Eventually you will have to return the borrowed shares, so you have buy the same number of shares back at hopefully a lower price and then return the shares you borrowed. This way you sell high and buy back low and then keep the difference in money. The way the investment goes bad is when you have to buy the shares back at a higher price then what you sold them at. You will lose the difference in price per share in that case.
Examples of How Shorting a Stock Works:
An Example of a Profitable Short
You borrow 100 Shares of $XYZ and sell those shares at the market price of $50 each. You must return these shares within 6 months. Lets say in 3 months the market price of $XYZ is now $25 so you buy back 100 shares of $XYZ. You now return these 100 shares you borrowed. Since you sold them at $50 each you had $50*100 = $500. Then you bought 100 shares back at the price of $25 so you paid $25*100 = $250. So you made $500-$250 = $250!
An Example of a Loss Using a Short
Using the previous example, let’s say you did not buy the shares back at $25 each and instead you waited longer. Now it has been 6 months and you have to return the 100 shares of $XYZ. You have to buy back the shares and now the Market Price is $80 each. You pay $80*100 = $800 total to buy them back and then return the borrowed shares. You originally sold them for $50 each, so you end up with $500-$800 = -$300. You lost $300 this time because the stock price rose when you shorted it.
Use This Strategy in Bad Market Conditions
Shorting stocks can be a very useful strategy especially when Market Conditions are unfavorable. At YP Investors we display these Market Conditions for our members on the Member Home Page and on the Stock Selector Tool. If you aren’t a member yet you can sign up for with a free trial membership here!
We hope you were able to understand how to short a stock so that you can use this in your own investments or trades. Check out our Investing Videos and Tutorials for more strategies and tools. Good luck and continue to grow your wealth with YP Investors.