Short Selling Explained the easy way

Most people wouldn’t think that there is money to be made in a company that is about to see its last days. I must say that this does sound a bit impossible to believe. In reality that is far from true. There is a lot of money to be made in a company on its last leg. It’s called short selling. Short selling is when you trade in stocks of a company that’s on its way out of business. It may sound a bit confusing and hard to believe but by the end of this you will have a good understanding of what short selling is.

What Is Shorting a Stock

  We gone start with what is shorting a stock and how is this any difference from going long. The simplest way to put this my friends is, short selling is betting against a stock. No difference from making a bet that a sport team will lose a game. And long selling is betting they will win. Well that the stock will grow. Simple enough so far, right? Good. Now how you bet against a stock is you borrow stocks of the company you think is going to fall, from that company. Now whenever you borrow something you have to pay it back at some point and time. You can do with this stock what you please, but you will have to give it back. There are some risks that comes with this it we’ll save that for later. So, once you own the stock you need to sell it at its highest before the stock goes down. Hold to the money till it’s time to pay it back. And if the stock did fall when it comes time to pay it back. You just pay back the price of stock at that current time and pocket the profit. For example, if you borrow a stock at a hundred dollars and sell it right away, in a week if that stock falls to twenty dollars when it’s time to pay it back, you only have to pay 20 dollars and keep the $80 from when you sold it. If the stock fall to zero, you get to keep everything. Before you hit the stock market looking for these companies on their way out of business, let’s go over the risks.

Risk

  Now my friends this is a very risky way to make money. It’s like swimming with sharks with a bloody nose. The number one way this can come back and hurt you is when you guess wrong, and the stock doesn’t fall but instead it raises. So, the more the stock goes up the more you have to pay for it when it’s time to give it back. There are no limits of amount of money you could lose since there’s no telling how far a stock can raise. Another way you can lose with this is that the Leander can ask for the stock back at any time. Even if the stock price doesn’t change you will still be out of money because of fees, loan fees.

Maintenance Margins

  But the way around taking too much of a loss is called, maintenance margins. This is how it works, in order to short sell stock you must deposited an amount of money as a buffer to cover losses that may come. It’s still your money it’s just there in case anything goes wrong. This gives both parties some insurance if things go bad.

Summary

  That’s pretty much it my friends, short selling explains the best way I know how. Now be very careful with this my friends because you can loss big with this. Most people who know what they are doing use both short selling and long selling to make a profit. Do your own research before you make a decision if you want to give it a try. Good luck!