What does it mean to short a stock?
The opposite of a “long” position is a “short” position. A "short" position is generally the sale of a stock you do not own. Investors who sell short believe the price of the stock will decrease in value. If the price drops, you can buy the stock at the lower price and make a profit.
What is shorting a stock example?
Example of Short Selling for a Profit Imagine a trader who believes that XYZ stock—currently trading at $50—will decline in price in the next three months. They borrow 100 shares and sell them to another investor. The trader is now “short” 100 shares since they sold something that they did not own but had borrowed.
How does short selling a stock work?
In short selling, an investor borrows stock shares that they believe will drop in price, sells those borrowed shares at market price, then buys back the shares at a lower price. To complete the short sale, the investor returns the shares to the original lender and profits the difference between the buy and sell prices.Feb 25, 2022
What is shorting a stock for dummies?
selling short means that you borrow a security and sell it in hopes of repaying the loan of the shares by buying back cheaper shares later on. Traditionally, investors and traders want to buy low and sell high.Jul 6, 2021
Can you short stocks on Robinhood?
Shorting stocks on Robinhood is not possible at present, even with a Robinhood Gold membership, the premium subscriptions which allows Robinhood investors to use margin for leveraging returns. Instead, you must either use inverse ETFs or put options.
What happens if you short a stock and it goes up?
When a stock is heavily shorted, and investors are buying shares — which pushes the price up — short sellers start buying to cover their position and minimize losses as the price keeps rising. This can create a “short squeeze”: Short sellers keep having to buy the stock, pushing the price up even higher and higher.Jan 29, 2021
Do you need money to short a stock?
To maintain the short position, the investor must keep enough equity in the account to serve as collateral for the margin loan — at least 25% per exchange rules. However, brokerages may have a higher minimum, depending on the riskiness of the stocks as well as the total value of the investor's positions.Feb 16, 2022
How long can you short a stock?
There is no time limit on how long a short sale can or cannot be open for. Thus, a short sale is, by default, held indefinitely.
Who pays out when you short a stock?
Short sellers are wagering that the stock they are short selling will drop in price. If the stock does drop after selling, the short seller buys it back at a lower price and returns it to the lender. The difference between the sell price and the buy price is the short seller's profit.
Can anyone short a stock?
There's no time limit on how long you can hold a short position on a stock. The problem, however, is that they are typically purchased using margin for at least part of the position. Those margin loans come with interest charges, and you will have to keep paying them for as long as you have your position in place.
Is shorting a stock legal?
Short selling is a legal form of stock trading in which a trader bets a stock's price will drop. The trader borrows the stock and sells it, with the understanding the loan must be repaid with similar shares bought in the market.
What are the most shorted stocks?
Most Shorted StocksSymbol SymbolCompany NameFloat Shorted (%)CWH CWHCamping World Holdings Inc. Cl A41.37%BGFV BGFVBig 5 Sporting Goods Corp.40.89%CTRN CTRNCiti Trends Inc.40.77%HRTX HRTXHeron Therapeutics Inc.39.86%42 more rows
What Does it Mean to Short a Stock?
When an investor goes long on a stock, she buys it with the belief that it is going to increase in value over time. Going short, on the other hand, is what some investors do when they believe the stock is about to decrease and think they can take advantage of that. In short selling a stock, the investor doesn't actually own it.
Why Do People Short-Sell Stocks?
Why do some investors decide to do this? It's clearly a high-risk situation for them, and even more out of their control than a usual investment. Is it worth it?
Risks of Short-Selling
There are rewards in short-selling if you get it right. But investors don't always get it right -- and enough of them trying to can have major consequences for an economy.
Notable Examples of Short-Selling
Some economists put part of the blame for the 2008 stock market crash and Great Recession on all the investors short-selling companies like Fannie Mae and Freddie Mac after the housing market collapsed.
What Is Short Selling?
Short selling is an investment or trading strategy that speculates on the decline in a stock or other security's price. It is an advanced strategy that should only be undertaken by experienced traders and investors.
Understanding Short Selling
Wimpy of the famous Popeye comic strip would have been a perfect short seller. The comic character was famous for saying he would "gladly pay next Tuesday for a hamburger today." In short selling, the seller opens a position by borrowing shares, usually from a broker-dealer.
Short Selling for a Profit
Imagine a trader who believes that XYZ stock—currently trading at $50—will decline in price in the next three months. They borrow 100 shares and sell them to another investor. The trader is now “short” 100 shares since they sold something that they did not own but had borrowed.
Short Selling for a Loss
Using the scenario above, let's now suppose the trader did not close out the short position at $40 but decided to leave it open to capitalize on a further price decline. However, a competitor swoops in to acquire the company with a takeover offer of $65 per share, and the stock soars.
Short Selling as a Hedge
Apart from speculation, short selling has another useful purpose— hedging —often perceived as the lower-risk and more respectable avatar of shorting. The primary objective of hedging is protection, as opposed to the pure profit motivation of speculation.
Pros and Cons of Short Selling
Selling short can be costly if the seller guesses wrong about the price movement. A trader who has bought stock can only lose 100% of their outlay if the stock moves to zero.
Additional Risks to Short Selling
Besides the previously-mentioned risk of losing money on a trade from a stock's price rising, short selling has additional risks that investors should consider.
This method of betting against the stock market can be lucrative but has big risks
Matt is a Certified Financial Planner based in South Carolina who has been writing for The Motley Fool since 2012. Matt specializes in writing about bank stocks, REITs, and personal finance, but he loves any investment at the right price. Follow him on Twitter to keep up with his latest work! Follow @TMFMathGuy
When short-selling makes sense
At first glance, you might think that short-selling would be just as common as owning stock. However, relatively few investors use the short-selling strategy.
The risks of short-selling
Short-selling can be profitable when you make the right call, but it carries greater risks than what ordinary stock investors experience.
Alternative to shorting
As a final thought, an alternative to shorting that limits your downside exposure is to buy a put option on a stock. Essentially, a put option gives you the right, but not the obligation, to sell a stock at a predetermined price (known as the strike price) at any time before the option contract expires.
What is short selling?
Short selling is when a trader borrows shares from a broker and immediately sells them with the expectation that the stock price will fall shortly after. If it does, the trader can buy the shares back at the lower price, return them to the brokerage and keep the difference as profit.
Why short a stock?
Investors may use a shorting strategy as a form of speculation. In other words, it’s a high-risk maneuver that could possibly yield high returns in exchange for taking on exceptional risk.
How to short a stock
First you’ll need a margin account. Borrowing shares from the brokerage is effectively a margin loan, and you’ll pay interest on the outstanding debt. The process for obtaining a margin account varies by brokerage, but you’ll probably need to be approved for it.
But what if the stock price rises?
In a traditional stock purchase, the most you can lose is the amount you paid for the shares, but the upside potential is theoretically limitless.
Short-selling controversy
Short-sellers receive all kinds of criticism. They've been accused of hurting businesses, manipulating public opinion and spreading rumors about a company or stock. It's even been implied that short-sellers are almost unpatriotic for not supporting publicly traded companies.
Example of a Short Sale
For example, if an investor thinks that Tesla (TSLA) stock is overvalued at $625 per share, and is going to drop in price, the investor may "borrow" 10 shares of TSLA from their broker, who then sells it for the current market price of $625.
What Are the Risks?
Short selling involves amplified risk. When an investor buys a stock (or goes long), they stand to lose only the money that they have invested. Thus, if the investor bought one TSLA share at $625, the maximum they could lose is $625 because the stock cannot drop to less than $0. In other words, the maximum value that any stock can fall to is $0.
Why Do Investors Go Short?
Short selling can be used for speculation or hedging. Speculators use short selling to capitalize on a potential decline in a specific security or across the market as a whole. Hedgers use the strategy to protect gains or mitigate losses in a security or portfolio.
When Does Short Selling Make Sense?
Short selling is not a strategy used by many investors largely because the expectation is that stocks will rise in value. The stock market, in the long run, tends to go up although it certainly has its periods where stocks go down.
How to short a stock: 6 steps
These instructions assume that you have a brokerage account that you can use to buy and sell stocks. If not, here is a guide on how to get one.
What short selling is and how it works
Buying a stock is also known as taking a long position. A long position becomes profitable as the stock price goes up over time, or when the stock pays a dividend.
A simple analogy for understanding short selling
It may be easier to understand short selling by considering the following analogy.
Short selling has several major risks
Short selling is incredibly risky, which is why it isn't recommended for most investors. Even professionals often lose a lot of money when shorting.
Shorting alternatives: other ways to profit from declining prices
There are several other ways to profit from falling prices that are also risky, but not quite as risky as short selling.
Only go short if you truly know what you are doing
At the end of the day, short selling is a very risky trading method that should only be done by sophisticated investors.
Technical Trends
Look at a chart of the stock you are thinking about shorting. What is the general trend? Is the stock under accumulation or distribution ?
Estimates Ratcheted Down
When a company misses its quarterly earnings estimates, management will usually try to explain to investors what happened in a conference call or press release. Following this, Wall Street analysts work to compose a report and distribute it to their brokers.
Tax-Loss Selling on the Horizon
In the fourth quarter, you will note that companies trading in the lower end of their 52-week trading range will often trade even lower. This is because individuals and mutual funds want to book some of their losses before year-end to reap the tax benefits.
Insider Selling
There are plenty of reasons why an insider might sell his or her stock. This may include buying a home or simply a desire to book some profits. However, if a number of insiders are selling the stock in large quantities, it may be a wise move to view this as a harbinger of things to come.
Fundamentals Deteriorating
You don't need to find a company that is on the verge of bankruptcy to successfully short its stock. Sometimes you need to see only a mild deterioration in a company's overall fundamentals for big holders of the stock, such as mutual funds, to get fed up and dump the shares.
Declining Sector Trends
While a company will occasionally buck a larger trend, most companies within a given sector or industry trade in relative parity. That means supply and demand issues facing one company are likely to impact others at some point down the road. Use this information to your advantage. Make phone calls to a company's suppliers and/or customers.
The Bottom Line
Investors need to be aware not only that short selling presents an opportunity to generate tangible gains, but also that signals can alert an investor when a stock is about to take a fall. This knowledge will make you an immeasurably better investor.
If you've ever wanted to make money from a company's misfortune, selling stocks short can be a profitable -- though risky -- way to invest
Matt is a Certified Financial Planner based in South Carolina who has been writing for The Motley Fool since 2012. Matt specializes in writing about bank stocks, REITs, and personal finance, but he loves any investment at the right price. Follow him on Twitter to keep up with his latest work! Follow @TMFMathGuy
Why would you short a stock?
Typically, you might decide to short a stock because you feel it is overvalued or will decline for some reason. Since shorting involves borrowing shares of stock you don't own and selling them, a decline in the share price will let you buy back the shares with less money than you originally received when you sold them.
How do you short a stock?
In order to use a short-selling strategy, you have to go through a step-by-step process:
A simple example of a short-selling transaction
Here's how short selling can work in practice: Say you've identified a stock that currently trades at $100 per share. You think that stock is overvalued, and you believe that its price is likely to fall in the near future. Accordingly, you decide that you want to sell 100 shares of the stock short.
What are the risks of shorting a stock?
Keep in mind that the example in the previous section is what happens if the stock does what you think it will -- declines.
Be careful with short selling
Short selling can be a lucrative way to profit if a stock drops in value, but it comes with big risk and should be attempted only by experienced investors. And even then, it should be used sparingly and only after a careful assessment of the risks involved.
What Does It Mean to Short A Stock?
Why Do People Short-Sell Stocks?
- Why do some investors decide to do this? It's clearly a high-risk situation for them, and even more out of their control than a usual investment. Is it worth it? If they play their cards right, certainly. And what could be more tempting for an experienced investor than the ability to make money off of a company's decline instead of losing money from it? It's not something that would necessaril…
Risks of Short-Selling
- There are rewards in short-selling if you get it right. But investors don't always get it right -- and enough of them trying to can have major consequences for an economy. The pros of shorting a stock are all based on the idea that a short-seller's instinct that a stock is about to tank is a sound, logical one that will come true. Despite your best efforts, however, that isn't something that can …
Notable Examples of Short-Selling
- Some economists put part of the blame for the 2008 stock market crash and Great Recessionon all the investors short-selling companies like Fannie Mae and Freddie Mac after the housing market collapsed. At its worst, too much short-selling may have contributed to major economic problems. In other instances, it can tell you how investors view a company. One recent example …
When Short-Selling Makes Sense
- At first glance, you might think that short-selling would be just as common as owning stock. However, relatively few investors use the short-selling strategy. One reason for that is general market behavior. Most investors own stocks, funds, and other investments that they want to see rise in value. The stock market can fluctuate dramatically over short time periods, but over the lo…
The Risks of Short-Selling
- Short-selling can be profitable when you make the right call, but it carries greater risks than what ordinary stock investors experience. Specifically, when you short a stock, you have unlimited downside risk but limited profit potential. This is the exact opposite of when you buy a stock, which comes with limited risk of loss but unlimited profit ...
Alternative to Shorting
- As a final thought, an alternative to shorting that limits your downside exposure is to buy a put option on a stock. Essentially, a put optiongives you the right, but not the obligation, to sell a stock at a predetermined price (known as the strike price) at any time before the option contract expires. For example, if you buy a put option in a stock with a strike price of $100 and the stock …
Expert Q&A
- The Motley Fool had a chance to connect with an expert on shorting: Sofia Johan, an associate professor in the finance department of FAU's College of Business. The Motley Fool: What are some common misconceptions about short selling that investors should know? Johan: I think most investors believe the risks to be the same as that of taking long positions. Definitely not th…