Shorting stock is the opposite of buying stock and is a concept that can be hard to grasp. The aim is to 'buy high and sell low'. Shorting stock enables you to make money when the market is going down and when companies are failing, meaning that even when the economy is in recession you can still make money!
Example
- you sell 100 shares @ £10 ($1,000)
- then buy the 100 shares back @ $9 ($900)
- and make a profit of $100!
However to be able to sell short you need a brokerage account with a margin. A margin will enable you to effectively borrow money, which what you need to do to sell a share then and then buy it back again.
Example 2 (another way to get your head around shorting stock!)
- your friend is going on a long holiday, he lends you his car
-
you then sell his car for $10,000
- you go somewhere else and buy the same model car for $9,000
- when he returns from holiday he gets the same car back and you have pocketed $1000!
Whilst short selling stock is a great concept there is one word of warning, instead of receiving the
dividend, you will sometime have to pay it but as long as you make yourself aware of when the company dividends are it shouldn't be a problem.
Why not practice shorting stock with a
virtual trading account.
