Learn to Short Stocks

While most traders and investors profit from rising stock prices by investing in companies they expect to grow based on optimistic market sentiments, some dealers prefer to profit from declining share prices or struggling businesses. This approach is called short selling and is generally reserved for advanced traders with a deep understanding of market mechanics and careful risk management skills. Learn to Short Stocks.

Learn to Short Stocks: Strategies & Risks

Shorting stocks works by borrowing shares from your broker and then selling them on the open market, hoping that they will decline in price so that you can repurchase them at a lower cost and turn a profit. To make a successful short trade you’ll need to identify stocks that are overvalued and whose price you expect to decline. You’ll also need to take into account interest charges on borrowed shares and any dividends paid on the stocks you’re shorting, as well as margin requirements for your brokerage account.

The main challenge for short sellers is that the stock market as a whole tends to rise over time, which means if you sell a stock that’s on an upward trajectory you could potentially face unlimited losses. To avoid this, short sellers rely on strict and well-defined stop-loss limits to exit a position in case the stock’s price rises beyond their target. It’s also important to note that if your broker thinks you are shorting too many shares it may limit or close your position to protect itself from large losses, which can be a major setback to your trading career.