Selling Stocks Short
Selling short is the practice of selling stocks that a seller doesn’t really own with a hope of repurchasing them at a low price.
So for instance, let’s assume that you believe a stock is currently overpriced and is about to fall in price pretty soon. Since the main goal of any investor is to buy stock at a low price and sell it a a high price (in fact, high enough to cover the broker’s fees) the appropriate action would be to sell the stock. But you don’t own any stock, right?. Don’t worry! You can sell short.
So you can borrow the stock from a broker for a specified period of time, sell it and later on when the stock falls in price buy it back and return it to your broker.
Who Benefits:
- Broker: earning brokers fee as he conducts every single transaction.
- Investor: if the stock falls in price for any reason as it was predicted, he could earn money on that stock.
Who Losses:
- Broker: doesn’t loose even at worse case scenario.
- Investor: if the stock doesn’t drop in price as predicted in a specified period of time overall capital loss would occur.