Search
Friends
How To Short A Stock
Posted on Sep 24, 2008 - 10:25 PM EST
It’s surprising how many people out there haven’t got the slightest clue on what shorting a stock is all about. After reading the hundreds of emails we receive daily over at TIM, I’ve decided to write a short post (no pun intended) in layman terms as possible on what shorting is and how you too can short a stock using your online discount broker. Shorting: The concept is simple. It involves 3 people. You, your broker and an anonymous share holder. Say a stock you’re watching, let’s call it XYZ, is currently priced at $5/share and is poised to drop down due to some speculative bad press. You call up your broker and you ask him to lend you 10 shares of XYZ at $5/share. Your broker tries to find a share holder who currently owns 10 shares of XYZ and lends them to you. Now - what to do with the 10 shares you just borrowed? You sell it! You sell it for $5 to anyone willing to buy it in the open market. Remember, you do not own this stock - you’re selling a borrowed stock.
Now, here comes the best part. Say that $5/share stock XYZ you sold has dropped as predicted to $3/share. Since you sold 10 shares and have an obligation to pay back your broker, you decide to BUY 10 shares from the open market at $3.
See what just happened there? You sold a stock you borrowed for $5, then bought it back at $3 which makes you a profit of $2/share. You then call your broker and give him back the 10 shares you borrowed and the broker gives it back to the original share holder. All of this is done electronically and anonymously, so the original shareholder does not know what just happened nor does he care. The broker acts as the middleman who takes his commission on this transaction.
It will make a lot more sense once you actually short a stock. So this morning, after receiving the early morning stock watch-list fromTIM ALERTS, I decided to actually listen to TIM and short a stock.
I log into my ThinkOrSwim (TOS) account and search for SIL (Apex Silver Mines Limited). TOS promptly tells me that there are plenty of SIL’s to borrow - so I borrowed 600 shares at $3.47 (see bottom of table below). I immediately sold them for $3.47 and my order was filled. Now comes the waiting game. Tim’s alert asked us to look for support at $3 - so I put a buy order at $3.08. Twenty minutes later, my buy order was filled and i just made a quick profit of $250. See the transaction table below to see how it all went down.
Hopefully this would give you a little better idea on how to short a stock and actually profit from falling stocks. If you understood the basic concept, the next step would be to go buy our SHORTSTOCKING DVD which gets into a lot more detail on how to spot stocks that are good shorts, how to read chart patterns and how to easily make money like big hedge funds do by strictly shorting falling stocks. Then head out to TIMALERTS and sign up to receive a watch-list of potential shorts (and longs) every morning.
Happy Trading!
About Adarsh Pallian
Adarsh Pallian is a serial entrepreneur with over ten years of experience as a software developer, designer and a startup advisor. He has been quoted on Techcrunch, Mashable, The Huffington Post, The Financial Post, Fast Company and recently on Canadian national TV CBC. Get in touch here.