What is Shorting Stocks & Forex?

<<<<<<< HEAD

Intro...

To short Forex or stocks you are betting that the value of a market will go down. Shorting a market is the act of selling something that you do not own. In order to do this you have to borrow the shares of stock from your broker.

So, What is Shorting?

When you short a market, you will borrow the shares/Lots from your broker, wait until the price drops, buy the shares/Lots, then return the borrowed shares/Lost back and you will profit the difference. Here is an example:

Apple Inc is trading at $600 a share. You think that the price is going to go down so you short 10 shares ($6000). You are borrowing 10 shares of Apple from your broker at  $600. Just as you expected Apple goes down to $400 a share. I know what you're thinking.  Apple stock falling by $200!?! I know, I know, unlikely, but bear with me...:-)

You decide that you are ready to cash in, so you buy (called covering) the shares at $400. Your broker will now return the borrowed shares to the owner and you will profit the difference. Since you shorted at $600 and covered at $400 your profit is $200 a share on 10 shares - $2000.

From a traders perspective, all of this happens behind the scenes. You just simply log on to your account and click the sell (or short) button and you have just shorted the market (your broker borrowed the shares/Lots from someone else). When you are ready to cover, you click the buy (or cover) button and your done.

Pretty simple right? Not so fast.

There are some things you need to be aware of...
  • You must have a margin account to be able to short stocks. 
  • Your online broker may not have enough shares available for you to short.
  • If the stock pays a dividend while you are short, YOU will be liable (you'll have to pay it).
Is Shorting Stocks Ethical?

Some people claim that shorting stocks is un-ethical because they are contributing to the stock price going down. It's up to you to decide.  Personally I think that shorting is OK. Remember that after you short a market, you then have to buy it back! This creates buying pressure on the stock.  Short sellers slow the rapid decline of a stock by buying to cover on the way down. If the short sellers were not involved in the market, it could plummet! Also, short sellers can be caught in a "short squeeze".

What's a short squeeze?

This happens with a market that has heavy short interest. Let's say that many traders are short a particular market. If the market begins to rise rapidly, then short sellers will get nervous and want to buy (cover). This could add significant buying pressure to the market, encourage new long positions, and make the market explode!

Should I Short Stocks?

It is important that a swing trader learn to short markets. Buying positions is only half of the equation! If the market in general is in a downtrend, you are not going to want to buy. So in order to make any money you need to learn the art of shorting. Learning to short will also help you to better understand where reversals will take place. By shorting markets yourself, you will be able to gauge where other traders are going to short and cover their positions.

Sometimes you can make money faster by shorting than by buying. Why? Because markets typically go down at a faster rate, then when they go up! Fear is a much more powerful emotion than greed.  The general public only plays the long side of the market. They do not realize that you can make money shorting. They think that if a market goes up, then this is "good". If a market goes down, then this is "bad".

To Sum Up

So Bear markets aren't always bad. In a bear market, the financial press talk about how "dreadful" the market is - almost encouraging investors get out.  These very same experts are shorting markets and profiting all the way down. Once you begin to short the market, you will begin to get more comfortable with it. It won't make any difference to you whether we are in a bull market or a bear market.

Technical analysis is not an exact science and although these ideas can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course.

=======

Intro...

To short Forex or stocks you are betting that the value of a market will go down. Shorting a market is the act of selling something that you do not own. In order to do this you have to borrow the shares of stock from your broker.

So, What is Shorting?

When you short a market, you will borrow the shares/Lots from your broker, wait until the price drops, buy the shares/Lots, then return the borrowed shares/Lost back and you will profit the difference. Here is an example:

Apple Inc is trading at $600 a share. You think that the price is going to go down so you short 10 shares ($6000). You are borrowing 10 shares of Apple from your broker at  $600. Just as you expected Apple goes down to $400 a share. I know what you're thinking.  Apple stock falling by $200!?! I know, I know, unlikely, but bear with me...:-)

You decide that you are ready to cash in, so you buy (called covering) the shares at $400. Your broker will now return the borrowed shares to the owner and you will profit the difference. Since you shorted at $600 and covered at $400 your profit is $200 a share on 10 shares - $2000.

From a traders perspective, all of this happens behind the scenes. You just simply log on to your account and click the sell (or short) button and you have just shorted the market (your broker borrowed the shares/Lots from someone else). When you are ready to cover, you click the buy (or cover) button and your done.

Pretty simple right? Not so fast.

There are some things you need to be aware of...
  • You must have a margin account to be able to short stocks. 
  • Your online broker may not have enough shares available for you to short.
  • If the stock pays a dividend while you are short, YOU will be liable (you'll have to pay it).
Is Shorting Stocks Ethical?

Some people claim that shorting stocks is un-ethical because they are contributing to the stock price going down. It's up to you to decide.  Personally I think that shorting is OK. Remember that after you short a market, you then have to buy it back! This creates buying pressure on the stock.  Short sellers slow the rapid decline of a stock by buying to cover on the way down. If the short sellers were not involved in the market, it could plummet! Also, short sellers can be caught in a "short squeeze".

What's a short squeeze?

This happens with a market that has heavy short interest. Let's say that many traders are short a particular market. If the market begins to rise rapidly, then short sellers will get nervous and want to buy (cover). This could add significant buying pressure to the market, encourage new long positions, and make the market explode!

Should I Short Stocks?

It is important that a swing trader learn to short markets. Buying positions is only half of the equation! If the market in general is in a downtrend, you are not going to want to buy. So in order to make any money you need to learn the art of shorting. Learning to short will also help you to better understand where reversals will take place. By shorting markets yourself, you will be able to gauge where other traders are going to short and cover their positions.

Sometimes you can make money faster by shorting than by buying. Why? Because markets typically go down at a faster rate, then when they go up! Fear is a much more powerful emotion than greed.  The general public only plays the long side of the market. They do not realize that you can make money shorting. They think that if a market goes up, then this is "good". If a market goes down, then this is "bad".

To Sum Up

So Bear markets aren't always bad. In a bear market, the financial press talk about how "dreadful" the market is - almost encouraging investors get out.  These very same experts are shorting markets and profiting all the way down. Once you begin to short the market, you will begin to get more comfortable with it. It won't make any difference to you whether we are in a bull market or a bear market.

Technical analysis is not an exact science and although these ideas can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course.

>>>>>>> c0fd65f8ac5b5830dc3df1d307fcababd602b3a9
Comments