SHORT SELLING STOCK, Part Two
Part Two SHORT SELLING STOCK
Let’s move this section along and cover the topic you all came here to read. It’s short selling stock. This is a very bearish strategy. Bear meaning you think or hope the market or a particular stock will go down in value or price.
Let me pose the process simply. A situation or question will suffice. What if you could sell a stock which you do not own at $10 and then buy it in a month for for $7?—and pocket the $3 difference. In any other business that would be impossible to do.
So, how does this work? There are three people involved in short-selling a stock. One is you, the investor. The second is someone who will loan you the stock you want to sell. Get that? You do not own the stock. The third is the broker, and that person is important to this discussion, and to being the mechanic that makes this all work.
Here we go: You really think a stock is going to go down. You call your broker and tell them you want to short sell this $20 stock. They, or another investor they have, will loan you the stock. You borrow 1,000 (or 10,000, 50,000, or 500 shares). Your broker then sells your (borrowed) shares for $20 each, taking in $20,000. This money is put into your account. This money (all of most of it) will be put on hold in your account.
Your obligation is not to pay back the $20,000, but to return the person’s 1,000 shares. Whether you have to purchase these shares for $6 each or $6,000, or $32 each, or $32,000, ich mach nichts. Do you see the extra risks, and do you see why I wrote that this is a bearish strategy?
Once you’re approved for short-selling, this cash can be used for the hold amount. This doesn’t speak to how much experience they require or the amount of cash and other securities you must have in your account before they allow you to do this type of trade.
I used the word “trade,” meaning a play with a short-term horizon and with a specific cash-flow purpose.
See you in #3.