During many years shorting stock techniques has been a perfect trade tool for arbitrages, gamblers and also newcomers in the sphere of investments who are not afraid of taking personal responsibility for possible loss of their own capital.
The second name of the shorting stock process is short selling, and it means that the seller makes some transactions with stocks and shares which he/she even doesn’t really own. They can be taken on loan from the broker organization. These are not only securities but also different binary options. And, according to the plenty of website specialists’ reviews, the best of such organizations is Iqoption.com that gives its clients an opportunity to earn money even with the minimum experience. Shorting iqoption also needs firstly thorough investigation of the forex market and last trends in trading.
Why is it profitable to sell shortThe basic rule of short-sellers is that they try to make a transaction and to sell some shares because they see a trend of price lowing. Their vision of what does it mean to short a stock is that tomorrow or maybe in 2-3 days these shares can be returned for a much lower price. And the difference between sold and bought shares will become a profit. The majority of traders are interested in such short in time speculations but others want to protect their money and downside the possible risk of shares selling.
What does it mean to sell stock short ABCTraders who pay closer attention to short-term prospects are more likely to use technical analysis to benefit from short-term price maneuvers. The long-term prospects of the company turn out to be much less relevant since the trader is not going to keep the position open not only for more than a day but even more than a few hours. It cannot be said that the fundamental data of the company is completely ignored, as certain news releases and announcements can change the share price, and short-term traders can get some advantage from this.
Short position (short) is opened to receive income from the movement of the market down, that is, its fall. The purpose of opening a position is to enable:
- selling shares on the market at a high price, before “borrowing” from the broker shares in kind;
- waiting for the fall in value;
- buying shares at a low cost.
Let’s review a short example of what it means to short a stock. The trader “borrowed” from the broker 20 shares of Facebook Corporation, in the hope that their price will fall. After, the trader sells these shares on the same day for $30 on the stock exchange and, waiting for the fall in value to $15, acquires the sold 20 shares. Next, the trader gives back to the broker all 20 shares borrowed. The income of the trader in this case also depends on the difference that he received from the transaction. As a result, the trader, being in the position of shorts, gained a profit from the transaction in the amount of $300.
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A true example of what it means to short a stockMaybe the most impressive example of an unfortunate short selling with loss of the great amount of money is the situation with Northern Pacific railway shares. They cost just $170 and a lot of rich people in the USA took it on loan from their creditors just to make short trading. The price of these shares raised to $1000 for one day. All traders became bankrupts because they needed to return money to their creditors and just couldn’t.
Risks can be dangerousWe must not forget about a number of shortcomings of the game in short positions. When you play you should remember what does it mean when you short a stock. These risks include:
- Limited potential profit. In contrast to the “long” game, where the amount of potential income is not limited and can reach 100% or even 1000%, short positions give a limited profit (usually up to 100%). There is only one way to get out of the situation if you work with credit funds.
- Unlimited potential loss. The situation is different with losses during the trading period. For example, when opening a “long” position, it is impossible to lose more money than was invested (unless, of course, borrowed capital was used). In the case of short trades, the theoretical risk is unlimited, because the market can “fall” to the complete “devouring” of the available deposit.
- Danger from the market as a whole. Making a trade without cover, the trader borrows the share and undertakes to return it back at the time of closing the position. But there are cases when market participants force players to “short” ahead of time to close their positions, which becomes the cause of a significant increase in prices for overvalued assets. For example, a trader could correctly determine the company and wisely approach the risk assessment, but because of the “artificial” actions of some market participants he/she just loses own capital.
- Short sales can be made only when the value of the security is higher than the price of the previous operation. This rule leads to a decrease in potential income, because the transaction price may be lower than the market at the time of the transaction.
- The risks of short selling are much higher than when playing long positions. The traders could be in a corner situation. At a time when many short trades are open and the paper begins to rise in price, users rush to buy back their “shorts” to limit losses. The result is an even greater growth of the asset and, accordingly, large losses. There are cases of complete ruin on the “shorts”.