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YoungInvestors

YoungInvestors. Shorting Stocks Tutorial. Introduction. Investing technique which allows money to be made when a stock drops in value Opposite of long selling Involves risks. What is it?. Cash account vs. Margin account Selling of stock that the owner doesn’t own

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YoungInvestors

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  1. YoungInvestors Shorting Stocks Tutorial

  2. Introduction • Investing technique which allows money to be made when a stock drops in value • Opposite of long selling • Involves risks

  3. What is it? • Cash account vs. Margin account • Selling of stock that the owner doesn’t own • Sell shares borrowed from the firm with the promise of returning the same number of shares • Can short a stock for as long as you want, although interest is charged on margin • Do not get dividends since stock is borrowed

  4. Why Short? • Potential for very high returns  high risk • “Gambling” on stocks • Can earn a quick profit if you guess trends in the market correctly • Often for day traders, who closely monitor the market • In some senses, its the opposite of buying a stock

  5. The Transaction • Must have a margin account, as liability is unlimited • “Sell Short” or “Buy to cover”

  6. Risks • A gamble  betting against overall direction of the market • Losses can be infinite  you lose money when the stock price increases, stocks can potentially increase infinitely • Borrowed money  Borrowing money from brokerage firm using investment as collateral • Short squeezes  high demand for a stock triggered from news in the market can lead to inflation, increasing demand and stock price • Right at the wrong time  may take a lot of time for the price of a stock to come down

  7. Ethics • Critics see short selling as bad for the market and unethical (manipulation) • Short selling increases volume and liquidity (difference at which shares can be bought and sold) • Some unethical traders take short positions, manipulate stock prices using smear campaign, and then make profit

  8. Conclusion • Short-Selling is a great tool if it fits your preferences of risk and investment style • Investor sells borrowed shares in hopes of making profit when the price of the shares go down • Subject to rules of margin trading • Shorter must pay rights and dividends to owner of shares from whom they borrowed from • There are restrictions to which stocks can be shorted and when

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