This introduction to short story shorting stocks course, explains shorts borrow stock to sell at higher prices and later buyback to repay the loan and profit from low or falling prices. The lessons of this course cover the short selling process details and how it works for investors, companies and in stock markets.
What is short selling?
Short Story Shorting Stocks course, Lesson 1, answers the question, what is short selling? Links at the end guide you to related content if you want to learn more.
What you learn
Beside defining short selling, links and overviews to each lesson in the course gives some details on the material which is presented in each lesson. That gives you a good idea of the subject matter covered in each lesson and the course.
Caution: Know but don’t do
Investors that have got it wrong have lost houses or gone bankrupt shorting stock. Investors should know about short selling but few should do it. Knowing about selling short will make you a better investor.
However, shorting stock profitably and consistently demands a combination of knowledge and rare skills. That does not mean shorting is bad. It is not. In fact, shorting improves markets and companies.
The caution remains, shorting is not for beginners as this difficult and demanding strategy requires much knowledge and skill. This course introduces and provides a good overview of shorting. That will help make you a better investor by adding to your understanding of stock markets and investing.
Short trades profit when stock prices fall
Most times, most investors go long by buying stock expecting prices to increase in the future. Going short is the opposite. The short seller sells stock they borrow but do not own when they expect to buy it back at future lower prices. That can confuse someone hearing it for the first time. So a little sugar can help our understanding of short selling.
Sugar can help the short sale go down
Rather than borrowing stock, we borrow a cup of sugar. We borrow the sugar and sell it at a high price when we expect the price of sugar to have a big decline. To return the cup of borrowed sugar, we wait for the price to fall, then buy back at lower prices, return the cup of sugar, and pocket the difference as our sweet profit!
Short sellers need a willing broker
Rather than borrowing sugar, short sellers need a broker willing to loan stock. To profit from a falling stock price, the short seller must first be able to sell borrowed stock at higher prices. To do that, they need to find stock to borrow.
When they do and after buying it back to return the borrowed stock, paying the costs, and profiting from the difference between the selling and buying price. The multiple aspects and complications of the short selling process are covered by the lessons in this course.
Markets go up and down
We know stock markets can trend up, sideways or down. By short selling or shorting, investors and traders can make a profit when markets or a stock turns down. Short selling can profit from down trending markets or the falling price of a stock. Short sellers bet against a market or stock to profit from those falling prices.
Most of the time, the market rises which means between 60% to 80% of the time. Typical uptrends occur almost 70% of the time. In typical uptrending markets, investors buy or go long to profit from rising prices. Going long means buying and holding stocks. Long investors expect to collect any dividends as well as profit from the rising value of the stock they own.
Borrowing stock to seek profit
Novice investors can readily understand the idea of borrowing money to buy stock. Borrowing funds from their stockbroker is buying stock on margin. Rather than borrowing cash, short sellers borrow stock from their broker. They have to have a cash reserve and other investments on hand that the broker uses to secure the loan of stock.
To profit, the short seller needs the price of the stock to fall so they can buy it back at a lower price. They return the shares borrowed from their broker to cover their short. There are fees, but net of expenses, short sellers keep the balance as profit.
Short Sale Example: 100 shares of a $50 stock falls to $20 in 3 months:
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-$5000 – borrow a $50 stock from your broker
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+$5000 – immediately sell the stock for $50
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the stock price falls to $20 over 3 months
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+$2000 – buy the stock back at $20
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-$2000 – return the shares to your broker
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*-$ 125 – pay fees on $5000 (say 10% for 3 months)
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*-$10 in + $10 out – pay transaction costs
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+$2855 – net profit
*Costs of fees and commissions vary widely.
Short selling and evil capitalism
Short sellers can get painted as the bad guys of capitalism. They can spoil the party for the company and management being attacked. While shorts can be wrong, they are often right when pointing out weakness in company operations. Shorts do expose lies, cheating, corruption and management belligerence or abusive business practices.
Markets, companies and economies are better when mismanagement or missed opportunity gets exposed. In that way shorts do have an overall positive affect on markets. The how and why that can happen gets detailed in the lesson of the course.
Short Story Shorting Stocks course lessons:
The following lists each lesson by name and provides you with a link and an overview of the material covered in each of the lessons in this course.
Short selling improves markets
Lesson 2
Short selling improves stock markets with liquidity, price discovery and activity that can also improve some shareholder values. Short seller pressure has made managements more accountable as well as sensitive to public, employee and shareholder issues. That pressure has made some managements more receptive to contrarian views or analytics.
Short selling improves companies Lesson 3
Short selling improves companies by making management accountable and forcing checks on priorities, strategies and analysis to improve operations and increase shareholder value.
9 Short seller facts align
Lesson 4
9 Short seller facts align for experienced, knowledgeable short sellers to target a company. Stock market and company facts favoring shorts raises the odds of an attack.
Making money selling short
Lesson 5
Making money selling short needs the right timing, target and technique built on exceptional research and analytics to develop trades that make money with consistency. Other investors can use the data, analytics and research produced by short sellers to gain insight and market intelligence. That can help both long and short investors improve their stock market vision and understanding.
Shorting stocks has risks
Lesson 6
Shorting stocks has risks that must be known, understood and managed including unique risks beyond those of a normal market that all investors know and deal with. Investors that know short sellers cope with those many risks, gain a deeper understanding of stock markets.
Who’s selling your stock? Lesson 7
Who’s selling your stock is a lesson to make investors aware their broker may be loaning your stock to a short sellers borrowing from your broker. Shorts borrow the stock to sell before prices fall when they buy it back at lower prices to repay at a lower cost.
Short seller skill sophistication, knowledge & experience Lesson 8
Short seller skill, sophistication, knowledge and experience supports investing and trading know-how beyond the ability of most investors. Experienced short sellers combine timing, judgement and facts in effective strategies that using their broad market vision and awareness to profitably short trade.
Short seller cost control Lesson 9
The best short seller cost control comes from playing the right stock at the right time! Timing is the cost control secret of short sellers that keep costs of fees, commissions, other carrying charges or dividend expenses as low as possible. Get that done and line up prices with volumes to produce a short selling profit.
Short selling has rules
Lesson 10
Short selling has rules that apply to all parts of this strategy. Rules on borrowing stock and selling restrictions put shorts in a high cost, high risk play, ruled by brokers, exchanges and regulators. Short sellers know and understand all rules that apply in markets they short.
Question Answered!
The lesson defines short selling to answer the question, what is short selling? Shorting is borrowing stock to sell at high prices for buyback later at lower prices. Then paying back the borrowed stock, paying the costs and pocketing the price difference as profit.
Lesson takeaways, Introduction to short story shorting stocks
This introduction to short story shorting stocks course, defines short selling as borrowing stock to sell at high prices for buyback later at lower prices. Then after paying back the borrowed stock and costs, the price difference get pocketed as profit. Course lessons cover the details of the short selling process and how it works in stock markets including the following:
- Corrections with 10% price drops happen regularly.
- Dips and corrections generate much meaningless market noise.
- Corrections are quick 2 to 14 week events about once a year.
- Cause, effect and timing of corrections has not been discovered.
Other related lessons: Introduction to short story shorting stocks
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Short selling improves markets
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