FutureStarr

Short a Stockor

Short a Stockor

Short a Stock

Prices for stocks are constantly changing, and trying to keep track of how your portfolio is doing can be difficult. This article provides a roundup of different tools you can use to follow the market and make adjustments to your portfolio.

Stock

As an example, let's say that you decide that Company XYZ, which trades for $100 per share, is overpriced. So, you decide to short the stock by borrowing 10 shares from your brokerage and selling them for a total of $1,000. If the stock proceeds to go down to $90, you can buy those shares back for $900, return them to your broker, and keep the $100 profit. Specifically, when you short a stock, you have unlimited downside risk but limited profit potential. This is the exact opposite of when you buy a stock, which comes with limited risk of loss but unlimited profit potential. When you buy a stock, the most you can lose is what you pay for it. If the stock goes to zero, you'll suffer a complete loss, but you'll never lose more than that. By contrast, if the stock soars, there's no limit to the profits you can enjoy. It's quite common for long-term stock investors to earn profits that are several times the size of their initial investment.

With short-selling, however, that dynamic is reversed. There's a ceiling on your potential profit, but there's no theoretical limit to the losses you can suffer. For instance, say you sell 100 shares of stock short at a price of $10 per share. Your proceeds from the sale will be $1,000. If the stock goes to zero, you'll get to keep the full $1,000. However, if the stock soars to $100 per share, you'll have to spend $10,000 to buy the 100 shares back. That will give you a net loss of $9,000 -- nine times as much as the initial proceeds from the short sale. And if you think losses like this aren't possible, think again. Still, even though short-selling is risky, it can be a useful way to take calculated positions against a particular company for investors who know what they're doing. Managing your risk is important, but when used in moderation, short-selling can diversify your investment exposure and give you an opportunity to capture better returns than someone who only owns stocks and other investments. (Source: www.fool.com)

 

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