So I’m reading up on the different trade options on Scottrade, and I come across the option of selling short. And I think to myself: Great! I can make money on a down market. At the same time, I think there must be a catch. Is there one, apart from the possibility of losing more money that you actually have in your account?
Here’s the catch:
If and when the trade goes against you – the stock’s price starts going up – and you aren’t around to buy those shares, Scottrade AS WELL AS every other broker wants to be paid.
As I tell folks:
"On Wall Street, there aren’t any gifts."
Thanks for asking your Q! I enjoyed answering it!
VTY,
Ron Berue
Yes, that is my real last name!
Comment by Ron Berue — December 23, 2009 @ 1:22 pm
Hell yeah. Market starts going up and you’re in big trouble. Remember, size (short) does matter.
And another thing. Don’t start thinking you know what the market is gonna do. I’m wrong two times for every time I’m right.
Comment by epatton714 — December 23, 2009 @ 1:22 pm
Unlimited losses when you short. Historically, the stock market goes up over long periods. Shorting stocks is not an investment idea, it is a trading tool.
Comment by pumpdatiron — December 23, 2009 @ 1:22 pm
stocks can go up forever……………………you still have to buy it back.
you have to pay for the stock you borrowed to sell short(the buyer does not care if you sold short, he wants his stock)
the stock you borrowed can be called back by the loaner…….you have to cover……….
Comment by richard t — December 23, 2009 @ 1:22 pm
theoretically your loss could be infinite, if the stock just keeps rising & you refuse to bite the bullet & replace it. Remember when you shorted it, you borrowed it and sold it. At some pt you must replace it.
Comment by edcob52 — December 23, 2009 @ 1:22 pm
When you buy a stock short you are borrowing the shares and selling them into the market. Its called a margin account. A margin account is essentially a loan, you need to maintain a certain margin requirement to maintain the account, usually 40% of the value of the stock, and if the stock moves against you, and starts going up the bank will issue a margin call, requiring you add funds to the account to maintain the margin requirement. There are unlimited losses in a short sale as well. Its alot easier for your investment to go to $0 in a short sale than a long purchase. Plus it goes against the history of the market. Historically if you hold a stock for a long period of time you are likely to see the stock go up, however a short sale is really a short term strategy, and you need to know that and be prepared to trade accordingly. Short selling really isn’t for amatuer investors.
Comment by financegal27 — December 23, 2009 @ 1:22 pm
Pumpdairon has it correct. short sales are a trading tool. It isnt something that an investor does.
I trade. Here is todays scenario:
CROX…. (ugly shoes) They announced an agreement with the NBA to be able to use all 32 teams logos on their shoes.
HMMM>.. I say .. that has to be a good thing. So I bought about 15 minutes after the market opened. 26.25. I realized very quickly that CROX was a crock, it was going no where. So I sold at 26.21 closing a long position. Then I sold short at 26.21 (actually both trades at once)…. I had to leave so I entered a "buy to cover" order at 25.30 .. for a gain of 91 cents a share.
That is a trader tool. I may have hung on and let it slide some more if I hadn’t had to leave the computer. It’s low for the day was 24.81.
Now as to the way things happen.
The "loaner" of the shorted stock does not know he has loaned out his stock.
If the loaner wants to sell his stock, the brokerage firm simply borrows from someone else.
If a short position is held long enough for a dividend, they the borrower is responsible for the dividend payment.
I DO NOT recommend day trading and I REALLY do not recommend short sales. I have been doing it for years and it cost a great deal of money to learn.
PS: If I had skipped CROX and both double my other position for the day LULU>.. I would have been lots better off.
Comment by mason pearson — December 23, 2009 @ 1:22 pm
It’s risky because the market historically goes up. Second, you don’t earn a dividend. I think there are some heavy tax implications too you may wan to look into.
Comment by Ryan — December 23, 2009 @ 1:22 pm