Do you ever feel like most of the stocks you buy normally head south right after you buy them?
Maybe you’ve thought you’d be better off just shorting stocks, but it sounds a bit complicated, right? Selling shares you don’t own, profiting when they sink in price … huh?
Good news: Short selling really isn’t all that scary or complicated. Sure, there are added risks and costs with shorting, but in the right situations, it can be a heck of an exciting ride.
As always, research and finding the best opportunities is key.
There’s no doubt that many (perhaps most) of the best traders short sell shares as a part of their trading strategy — but is short selling worth it? Let’s find out.
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Table of Contents
How to Make Money by Short Selling?
- Identify the stock. What makes a good shorting candidate is up to your trading style, just make sure whatever you short fits your well thought out trading criteria.
- Open a margin account. You’ll need to be able to borrow shares if you want to short them, so make sure you set up a margin account.
- Short sell the shares. Open up your trading platform and place the order, but try to use a limit order so you don’t get filled at a terrible price.
- Wait for the stock to fall. When you’re in a good position that’s going in your favor, good trading is about sitting on your hands — wait for the stock you short to make the down move you anticipated.
- Buy back the shares. Open up your trading platform again and close your hopefully profitable position.
- Pat yourself on the back. If you profit, congratulate yourself on a job well done!
The Risks With Short Selling
- Stock Borrowing Costs. Some stocks are hard to borrow for shorting and you have to pay a fee before you can borrow them. These fees can at times be large, so make sure you factor it into your risk/reward analysis before you make the trade.
- Buy-In. If you’ve short sold a hard-to-borrow stock and the original owner wants them back, your broker may be forced to close your position at any time. Make sure you consider how hard the shares are to borrow and factor the probability of a buy-in happening when you analyze the risk of the trade.
- Other Payments. Let’s say the stock you’ve shorted has a corporate event such as a share-split or spin-off. You’ll have to pay the original stockholder whatever they would’ve profited from the event. These events are hard to predict, so it may be a good idea to delve deep into the company’s fundamental situation before shorting.
- Dividends. When the stock you’ve shorted pays a dividend, you have to pay the original holder the value of the dividend. So make sure you check the company’s dividend schedule.
- The Short Squeeze. Stocks that are heavily shorted on the market can be a target of short squeezes. This is where the stock rises heavily in price due to positive developments in the company, or large traders bidding the stock up to punish the short sellers. Generally, many of the short sellers will rush to exit the positions, buying the stock back and pushing the price up further. You don’t want to be caught in a short squeeze, so always keep an eye on the short-interest figures.
- Margin Interest. Even after you’ve paid any initial borrowing costs, you can’t just borrow the stock for free — you have to pay margin interest. If you’re in and out of a trade quickly, maybe it won’t seem like much, but run the numbers. The interest you pay can definitely add up over time, especially if you hold a stock short longer term.
Why Should You Short Sell?
- To Take Advantage of a Bearish Market. When the stock market is headed downward, we often see the bulk of stocks making down moves in price. If you’re looking for smart trades in a down market, you’ll probably find them much easier by looking for short-selling opportunities.
- To Hedge Downside Risk. Say, for example, you’re holding a bunch of stocks long and you’re happy with the trades — but what if the stock market tanks a couple percent overnight? If you hold a few shorts and a few longs in various stocks, you might be able to hedge the downside risk. The profits the shorts could make up for the losses on the longs.
- You’re good at finding companies headed down in price. Even if you’re in a bull market environment, you may have a talent for finding crappy stocks that are about to collapse in price. If that sounds like you, developing the ability to play the short side could be just what you’re looking for.
- To be a well-rounded trader. You can be a one trick pony and only hold stocks long, but if you want to take advantage of all the opportunities the markets have to offer, you need to develop your skills in shorting stocks.
If you’re going to short sell, you’ll want to use a premium trading platform that makes your trading life easier and gives you the confidence of knowing that you have the exact same software used by many seasoned, successful traders.**
That platform is StocksToTrade. It was built by a group of active traders who wanted something to cut much of the stress, anxiety and time-wasting out of their busy trading days.
It’s exactly what we’ve always dreamed of as traders, and if you want to easily find great short opportunities each day, you should check it out.
Try StocksToTrade for 7 full days for just $7! It’s a great way to experience all of its powerful tools and features — and discover for yourself why so many traders call it the ultimate platform.
The Bottom Line
We hope this post helped you decide whether to add short selling to your trading skills arsenal.
There’s no doubt short selling can potentially help traders get ahead, big time — especially as stock prices often drop much quicker than they rise.
But since there are added risks and costs involved in shorting, make sure you understand all the possible pitfalls before shorting your first stock. There’s nothing to be afraid of; you just need to consider the added risks against your potential upside (risk/reward).
So, is it time to get started shorting? Make sure you get yourself set up with a 7-day trial of StocksToTrade and start finding some killer short opportunities.
Does short selling seem like a good fit for you? Why or why not? Leave a comment below!