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Posted: 4/25/2011 5:33:11 PM EDT
Link Posted: 4/25/2011 5:38:32 PM EDT
A short sale is teh opposite of "buy low, sell high". For when you feel a stock will lose "value". You basically sell off someone else's stock, and buy back the replacement when value's have fallen. At least that's what I've got out of it.
Link Posted: 4/25/2011 8:24:21 PM EDT
[Last Edit: 4/25/2011 8:24:51 PM EDT by _Soggy_]
Originally Posted By MisterPX:
A short sale is teh opposite of "buy low, sell high". For when you feel a stock will lose "value". You basically sell off someone else's stock, and buy back the replacement when value's have fallen. At least that's what I've got out of it.


I think you mean the opposite order it is executed. You sell the stock and buy it back later. If you believe the price will go down you short sell a stock. You would sell when it is high and buy back when it is fallen. At least that is the goal. It is where the term "don't short sell me" comes from.
Link Posted: 4/29/2011 7:41:03 AM EDT
When you think a stock is overpriced and will drop in price soon, you can sell short.

To do so, advise your stockbroker that you wish to sell short {quantity} shares of {stock name}. Not all stocks can be shorted. I think the current limit is $5 - so you can't short any stock worth less than $5.

The broker will then loan you shares of stock from one of their other customers, which you sell on the market for cash. The goal is to see the price drop and buy the stock back, thereby returning the loaned stock to your broker. You get the difference in price as profit if the stock goes down, or you might have to cough up extra cash to buy the stock back if it goes up, creating a loss.

If you borrow a stock that pays dividends, you have to pay the dividends to the broker (who owes it to the client he borrowed from) while you are short.

Most stock brokers will have restrictions on the cash you get from the initial sale - i.e. you can't short 1000 shares of Berkshire, then pull the cash out of your account and go buy an island somewhere as they want to make sure you have the funds to return their shares to them.

Selling short is risky as your profits are limited to the stock price per share. If you short a $25 stock, the MAXIMUM you can make is $25 a share, if it drops to zero and the company goes bankrupt. The maximum you can lose can be huge though - if you short at $25, and the company makes a great discovery and jumps up to $300/share, you are on the hook for $275/share to your broker. That's a lot of money out of your pocket.

Generally, short sales are for the pros.
Link Posted: 4/29/2011 7:52:33 AM EDT
[Last Edit: 4/29/2011 7:52:53 AM EDT by anr6t]
I think its also important to note that one can create an artificial short position by buying put options.

Investopedia Put Option definition

The advantage of a put option is limiting losses to you're purchase premium - if you buy a put contract for 100 shares, strike $45 for $100 and the stock goes to $60, you're only on the hook for you're $100 premium. Shorting 100 shares in the same situation on the hook for 100*$15 = $1,500.

The disadvantage is time - put contracts have a limited life (as determined by the contract), where short positions can be held indefinitely as long as margin requirements are met.
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