You own 100 shares of company XYZ at the current value of $100 per share. My research has lead me to believe that the stock price of XYZ is overvalued and a pull back is in the near future. I come to you, and ask to borrow your shares. You agree, as long as I pay you back the shares in the future. I take the share & sell them for $10,000 ($100 X 100 = $10,000).
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The next month the price of the shares have dropped to $60 per share. I purchase 100 shares @ $60 each (100 X $60 = $6000). I then take those shares to you as I said I would. You still have your 100 shares & I get to pocket $4000.
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In my opinion, this type of investing is like going to Las Vagas. It’s completely gambling with more than you most likely can afford. You have potential to lose more money then you would have if you bought the stock to go up in value. When you buy a stock for $10 a share, the most you can lose is $10. In shorting a stock, if the price goes up to say $40 you will have actually lost $30 in the process.
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I buy stocks for one reason and one reason only. To go up in value. When I invest in a company it’s because my research has shown me that the fundamentals are strong and the company is growing (as it should). Shorting stocks to me is a negative outlook on a lot more than just the stock market. When the bottom was dropping out of the financial’, I just didn’t invest them. Part of the reason that the financial sector tanked the way it did was because of the shorts that were being laid out.
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In order for an individual to short a stock, you must open what is called a margin account with a broker like Scot trade or TD Ameritrade & are subject to the regulations that govern shorting stock. If your thinking of shorting a penny stock. Forget it, there are guidelines to that which are too much to get into. Besides, you should be staying away from this type of practice anyway.
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