What Is Short Selling?

Ever been in a situation whereby stocks are bound to fall and you are sure that you could make a tidy sum from it? Traditionally, the belief has always been to never purchase a stock that you know it will lead to losses. However, short sellers always find this move the best when it comes to their business. Basically, short selling is a very risky investment that will always attract heavy losses if you cannot play your game well. The returns when things turn out well are very enticing though.

The process
The process of short selling is rather simple. The investor starts by identifying the stock that is bound to fall in terms of prices and lead to heavy losses. He then makes a move and borrows the stock from the holder so as to trade on it. Afterwards, the investor purchases back the stock he borrowed before he returns them to close the loan gap. If he finds out the stocks have fallen in prices since the time he made the initial purchase, he goes ahead and repurchases the stocks and the money made becomes his profit.

Basically, short sellers are individuals who enjoy and make gains out of the falling stock prices. They run by the motto of ‘buy low and sell high’ and ironically, this works for them. For you to start the activity of short selling, you must start by opening a margin account that you will use in the transactions. Afterwards, you will be asked to sign an agreement with your broker that will show that you agree to maintain a cash margin or pledge your stock as margin. A stock broker is your representative in the stock market that will always play a key role in advising you on how well the stock market is doing. He is a licensed agent who is allowed to trade shares in the stock market on your behalf. Afterwards, you are eligible to start your short selling endeavors.

Parties involved in this
In short selling, you are always involved in the trade with three important parties; the short seller, the original owner and the new owner. The short seller borrows the shares from the real owner and immediately sells them to the open market in the stock exchange to any willing buyer. Afterwards, the borrower is forced to go and make a purchase of the same shares but at a lower amount from the holders so as to refund the loan gap that has been created.

A margin account allows you to borrow from your brokerage company an amount that will help you make a short sell purchase. However, the borrowed amount must be in line with your portfolio value since this will act as your collateral for the amount borrowed.

To sell a short stock, you must first of all have a borrowed stock. This means that an in-depth research on the various available opportunities in the market must be done. Immediately you identify a gap, you can simply initiate the trade by calling your stock trader and advise him on your plans and intentions. He will be responsible with the other steps that involve looking for the available open markets that are willing to purchase your shares at a slightly higher amount as compared to their current values.

Acting fast
After identifying a potential investor, he will have to quickly make the step of selling the shares before they fall in price. This is always tricky since many of the brokers are always keen on the investments they make way before they actually make the move. Next, you will have to advise the broker to make the purchase of the same number of shares in a lower price so that you can come back and refund the borrowed individual. This will involve waiting for the prices to fall before making the move.

In engaging in short selling, you must be able to withstand any turn of events since the trade is always risky and the outcome can be what you did not plan for. However, in many cases, the short selling activity always carries a positive result and you can be sure of high profits. If you have the push for quick profits, try short selling. With this, you can be sure of high profits within a very short period of time.

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