Short Selling – no Cynicism!

What is shorting stocks?

• Shorting stocks is the act of selling something that you do not own.

• If you are reading about short selling for the first time, relax, this is difficult to digest for the first timers.

• When you short a stock, you will borrow the shares from your broker, wait until the price drops, buy the shares, then return the borrowed shares back and you will profit the difference.

Here is an example:
TISCO is trading at 700Rs a share. You think that the price is going to go down so you short 200 shares at 700. You are borrowing shares of TISCO from your broker at this high price of 700. Just as you expected TISCO goes down to 600Rs a share.

You decide that you are ready to cash in, so you buy (called covering) the shares at 600. Your broker will now return the borrowed shares to the owner and you will profit the difference. Since you shorted at 700.00 and covered at 600.00 your profit is 100.00 a share on 200 shares – Rs 20000!
YES, this all sounds confusing, it does in the beginning.
Read the last two paragraph once again.

In gist, Short selling is the exact opposite of buying stocks.

In a long position you buy shares cheap to sell them at higher levels.
While in a short position, you sell shares at a higher price to buy them cheap.

Pretty simple right? Not so fast.

There are some things you need to be aware of:

• You must have a margin account to be able to short stocks.
• Your online broker may not have enough shares available for you to short.
• If the stock pays a dividend while you are short, YOU will be liable.

Is shorting stocks ethical?
Some people claim that shorting stocks is un-ethical because they are contributing to the stock price going down. This is bogus! Remember that after you short a stock, you then HAVE to buy it back! This creates buying pressure on the stock.

Short sellers slow the rapid decline of a stock by buying to cover on the way down.

If the short sellers were not involved in the stock, the stock will only keep moving down to wipe out a major market cap!

• Short selling is just a way of trading a stock while in a down trend.
• There is nothing wrong with shorting. It’s just part of the everyday workings of the stock market.

Should I short stocks?
It is almost essential that a trend-trader learn to short stocks. Buying stocks is only half of the equation! If the market in general is in a downtrend, you are not going to want to be buying stocks. So in order to make any money you need to learn the art of shorting.

Learning to short stocks will also help you to better understand where reversals will take place. By shorting stocks yourself, you will be able to gauge where other traders are going to buy and cover.

Sometimes you can make money faster by shorting than by buying.
Why? Valid question!
Because, stocks typically go down at a faster rate, then when they go up!

Fear is a much more powerful emotion than greed!

The general public only plays the long side of the market. They do not realize that you can make money when stocks go down. They think that if a stock goes up, then this is “good”. If a stock goes down, then this is “bad”.

Wrong! It depends on which side (long or short) of the market you are on.

In a bear market, “some” people talk about how “horrible” the market is to encourage investors to sell.

They are shorting stocks and profiting all the way down!

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