Short Selling

Parent Strategy

When your borrow a security and then sell it to someone else. You later have to buy it back (ideally at a lower price) and return it to the original owner

Important of Short Sellers to Stabilize Markets
  • Short sellers are the first to buy in down markets - they buy to cover shorts
  • If there are no short sellers, there is less buying demand in bear markets
  • This could make prices drop faster/further in a bear market

As of 7/2018, there are very few short sellers left - it's become a dying art
Process of shorting
  1. You borrow shares in the investment from another party
  2. You sell those shares into the open market
  3. You hope that the investment will fall in value
  4. You close the position by buying shares in the market
  5. You give the shares back to the brokerage firm from which you borrowed them 
  6. You make a profit if you paid less for the shares than you sold them for intially

  • Short selling can be very risky - you can technically lose an unlimited amount (if a stock keeps going up)
    • On the flip side, your profit is limited to 100%
  • To sell a stock short, you must borrower it from your Broker
    • For popular shorts, you may have to pay a borrowing fee
    • You also have to pay out any dividends to the person you borrowed the share from