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