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