| 'Shorting' or short selling refers to the
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| | help to predict a fall in price of
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| selling of a contract, a bond or stock or
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| | stocks: -
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| a commodity that is not directly owned by
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| | - Market indexes coming near the prior
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| the seller. When practicing short
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| | resistance levels.
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| selling, a seller is committed to
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| | - Market trend showing technically
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| purchase the stock or commodity
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| | overbought levels.
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| previously sold.
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| | - Restlessness before the announcement of
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| Short selling stocks means to take the
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| | a state's government.
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| stock from a broker on loan and sell it
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| | - Market vulnerability during scandals.
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| off to someone else. This is done so that
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| | Large volume selling of stocks often
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| the seller buys back the stock, when the
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| | result in short-term high profits.
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| price falls. The shares are returned to
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| | However, there are certain guidelines to
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| the broker from whom they were initially
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| | be followed for successful short selling.
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| borrowed. The shorting profit or the
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| | They are:
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| difference in price goes to the seller.
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| | - All stocks are not 'short' able.
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| Short selling of stocks is a technique
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| | Generally, brokers inform a seller
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| used by investors to capitalize on a
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| | whether a stock can be used for short
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| probable decline in the stock price.
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| | selling or not.
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| To understand this better, let us
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| | - Sellers must open a margin account for
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| consider a company, say, ABC whose shares
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| | short selling. This depends on the
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| currently sell at $12 each. A short
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| | minimum balances and cash reserves.
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| seller borrows 50 shares of ABC and then
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| | Sellers are required to sign a contract
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| sells those shares to someone else at $12
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| | agreement with the brokers to open a
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| per share, for a total of $600. Now, if
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| | margin account. This agreement clearly
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| in future the price of shares of ABC
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| | states that a seller will follow the
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| falls to $10 per share, this short seller
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| | rules and regulations stated by the
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| would then buy back those 50 shares at
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| | broker.
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| $500 ($10 multiplied by 50 shares), send
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| | -Target bad-performance, overpriced
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| back the shares to the original owner
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| | companies, since the probability of a
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| broker and make a profit of $100.
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| | fall in the share price involves lesser
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| Short selling is risky, if the price per
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| | risk.
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| share goes up instead of declining, as
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| | - Traders and short sellers should use
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| expected. Suppose the price per share of
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| | stop orders to protect their capital from
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| ABC goes up to $15 per share, then the
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| | loss. Generally, brokers prevent a seller
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| short seller will have to cash in the
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| | from suffering loss more than the
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| previously sold 50 shares at $750, return
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| | principal. They may either compel the
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| the shares to the original owner and
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| | seller to quit the transaction or they
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| incur a loss of $150.
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| | may deposit funds to increase the
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| Shorting is a transaction done on margin.
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| | seller's capital.
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| Most brokers do not agree to short
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| | The short selling of stocks involves a
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| selling stocks below $5. This enables the
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| | lot of discipline. Sellers need to be
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| investors and short sellers to indulge in
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| | proactive, alert and disciplined when
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| the high-risk trading of stocks.
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| | shorting stocks.
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| Some of the following market situations
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