{"id":5869,"date":"2019-02-07T13:21:43","date_gmt":"2019-02-07T13:21:43","guid":{"rendered":"https:\/\/www.wasteyourtime.co\/?p=5869"},"modified":"2020-07-19T18:53:57","modified_gmt":"2020-07-19T17:53:57","slug":"shorting-stock-explanation","status":"publish","type":"post","link":"https:\/\/traders-paradise.com\/magazine\/2019\/02\/shorting-stock-explanation\/","title":{"rendered":"Shorting Stock &#8211; Explanation"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_74 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/shorting-stock-explanation\/#Shorting_a_stock_looks_very_simple_But_this_isnt_a_strategy_for_beginners\" >Shorting a stock looks very simple. But, this isn&#8217;t a strategy for beginners.<\/a><ul class='ez-toc-list-level-6' ><li class='ez-toc-heading-level-6'><ul class='ez-toc-list-level-6' ><li class='ez-toc-heading-level-6'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/shorting-stock-explanation\/#By_Guy_Avtalyon\" >By Guy Avtalyon<\/a><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/shorting-stock-explanation\/#What_is_shorting_stocks\" >What is shorting stocks?\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/shorting-stock-explanation\/#What_short-seller_do\" >What short-seller do?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/shorting-stock-explanation\/#How_to_shorting_a_stock\" >How to shorting a stock<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/shorting-stock-explanation\/#Who_can_short_stocks\" >Who can short stocks?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/shorting-stock-explanation\/#Is_timing_important_for_shorting_a_stock\" >Is timing important for shorting a stock?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/shorting-stock-explanation\/#How_long_to_stay_in_a_short_position\" >How long to stay in a short position?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/shorting-stock-explanation\/#Tools_for_shorting_the_stock\" >Tools for shorting the stock<\/a><ul class='ez-toc-list-level-5' ><li class='ez-toc-heading-level-5'><ul class='ez-toc-list-level-5' ><li class='ez-toc-heading-level-5'><ul class='ez-toc-list-level-5' ><li class='ez-toc-heading-level-5'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/shorting-stock-explanation\/#But_you_must_be_very_careful\" >But you must be very careful.<\/a><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h4><span class=\"ez-toc-section\" id=\"Shorting_a_stock_looks_very_simple_But_this_isnt_a_strategy_for_beginners\"><\/span><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-5871 size-full\" src=\"https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/02\/shorting-stock-explanation-2.jpg\" alt=\"Shorting Stock - Explanation 1\" width=\"800\" height=\"533\" srcset=\"https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/02\/shorting-stock-explanation-2.jpg 800w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/02\/shorting-stock-explanation-2-300x200.jpg 300w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/02\/shorting-stock-explanation-2-768x512.jpg 768w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/02\/shorting-stock-explanation-2-370x247.jpg 370w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/02\/shorting-stock-explanation-2-760x506.jpg 760w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/02\/shorting-stock-explanation-2-424x282.jpg 424w\" sizes=\"auto, (max-width: 800px) 100vw, 800px\" \/>Shorting a stock looks very simple. But, this isn&#8217;t a strategy for beginners.<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<h6><span class=\"ez-toc-section\" id=\"By_Guy_Avtalyon\"><\/span><a href=\"https:\/\/www.linkedin.com\/in\/guy-avtalyon-67941b54\/\">By Guy Avtalyon<\/a><span class=\"ez-toc-section-end\"><\/span><\/h6>\n<p>Shorting a stock is when a trader borrows stocks and quickly sells them. She or he does that in the hope that can buy them back later at a lower price and return them to the broker or lender. Of course, the trader pockets the difference in the stock price. Shorting is riskier than simply buying stocks. A trader that practice shorting is taking a short position, while investors that are buying and holding stocks have so-called a long position.<\/p>\n<p>In other words, when some trader starts short selling, he or she borrows stocks from an existing stockholder through the brokerage. Than sells borrowed shares at the current market price and takes the cash.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"What_is_shorting_stocks\"><\/span><strong>What is shorting stocks?\u00a0<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Generally speaking, when you invest in stocks, you expect to profit from a company\u2019s great times and increasing profits.<\/p>\n<p>But this is a whole different type of traders, called shorts. They do just the contrary. They search the Internet for news about car industry recalls, for example, and look for ways to cash when the stock of such a company is falling.<\/p>\n<p><span style=\"font-weight: 400;\"><a href=\"https:\/\/traders-paradise.com\/magazine\/2019\/03\/invest-stocks-little-money\/\">It&#8217;s possible<\/a> to make money when prices are going down. Of course, if you are willing to accept the risks which are big. One of the strategies to profit on a downward-trending stock is selling short. The hope behind shorting a stock is that its price will decrease or the company will go bankrupt. Of course, it can lead to total ruin for the stock owners.\u00a0<\/span><\/p>\n<p>Shorting a stock means you are profiting if the stock price drops inside the timeframe from your entering the deal and turning back the stock. But if stock price increases, you&#8217;ll take a loss. You can short almost every asset, stocks, ETFs, and REITs, but never mutual funds.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"What_short-seller_do\"><\/span><strong>What short-seller do?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The short seller is a trader who is buying the stock back but at a much lower price. However, the short seller must promise to return the borrowed stock at some period in the future. Otherwise, the true owner or broker will never borrow the trader a stock.<br \/>\nBorrowed shares have no dividends until the short seller turns them back. Even more, he has to compensate for missing payments to the lender from his own pocket. So, when short-selling it is very important to have accurate information.<\/p>\n<p>When you want to close your short position, you have the obligation to buy the same number of shares at the current price and return them to the lender. Your profit or your loss comes from the difference between the price you sold the stock and the price you bought them for.<br \/>\nThe stock for short selling can come from the broker&#8217;s inventory, a client of the firm, or from another brokerage company. When the shares are sold, the profits are added to your account.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"How_to_shorting_a_stock\"><\/span><b>How to shorting a stock<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>That involves some important steps. <span style=\"font-weight: 400;\">One of them is a short-term <a href=\"https:\/\/traders-paradise.com\/magazine\/2019\/03\/simple-forex-trading-strategy\/\">strategy<\/a>.<\/span><\/p>\n<p>Selling short is essentially created for a quick profit in stocks that you expect to decrease in value.<br \/>\nThe main risk of shorting a stock is a possibility for the price to increase, and as a result, you&#8217;ll have a losing trade and losses. The possible stock price valuing is theoretically unlimited. Therefore, you are maybe exposed to great losses in a short position.<br \/>\nAlso, shorting stocks involves margin. Hence, a short-seller can be subject to a margin call if the stock price moves up. A margin call requires a short seller to deposit additional money into the account to fill the initial margin balance.<br \/>\nAlso, there are some restrictions on who can sell short, which stocks can be shorted, etc. You must be familiar with the regulation if want to short a stock. For example, some limitations are put on stocks wit low price.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Who_can_short_stocks\"><\/span><b>Who can short stocks? <\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>First of all, it isn&#8217;t for amateurs.<\/p>\n<p>Unlimited losses and a margin account can be exceptionally dangerous for an amateur trader. Especially you don&#8217;t completely understand the risk you&#8217;ll face whenever you enter a short position without protection.<br \/>\nDue to the possible large losses that short selling generates, brokerages lower this strategy to margin accounts. In case you use a cash account without margin, you&#8217;ll not be allowed to short selling.<br \/>\nIf you&#8217;re not a short seller and don&#8217;t like your stocks to be borrowed, the best option is to open a cash account. That will hold away short-sellers to borrow your stocks without your personal permission.<br \/>\nThis is usually good practice, anyway.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Is_timing_important_for_shorting_a_stock\"><\/span><b>Is timing important for shorting a stock?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">In short, yes. The most important for shorting a stock is to know which one or more could be overvalued, also when it may drop, and when it may rise in value.<br \/>\nShorting a stock is possible because the stock can be overvalued. For example, the housing bubble in 2008. Firstly, we had an enormous increase in housing costs. So, when the bubble popped we had a correction in the stock market. Remember, stocks can be overvalued or undervalued. In shorting is important to know which one is overvalued.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"How_long_to_stay_in_a_short_position\"><\/span><b>How long to stay in a short position? <\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>You can enter and exit a short position on the same day. \u00a0Or you may hold on the position for several days or weeks depending on the <a href=\"https:\/\/traders-paradise.com\/magazine\/2019\/03\/types-stocks-trading\/\">strategy<\/a> and how the stock is performing. Timing is especially important to short selling. \u00a0But the possible influence of tax practice is important also. So, we have to say, this is a strategy that requires practice and study.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Tools_for_shorting_the_stock\"><\/span><b>Tools for shorting the stock<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Shorting a stock is a strategy that demands to identify winners and losers.<br \/>\nFor example, you may choose to go long a carmaker because you expect it&#8217;s possible to take market share. But, at the same time, you can go short to another carmaker that might sink.<br \/>\nShorting is useful to hedge the current long position. For example, you hold stocks of the company and you expect it to decline in the next few months. But you don&#8217;t want to sell that stock. So, you could hedge the long position by shorting that stock while expecting it to decrease. When the stock turn to grow again all you need is to close the short position.<\/p>\n<h5><span class=\"ez-toc-section\" id=\"But_you_must_be_very_careful\"><\/span>But you must be very careful.<span class=\"ez-toc-section-end\"><\/span><\/h5>\n<p>Shorting a stock appears as very simple. But, keep in mind, this isn&#8217;t a strategy for beginners. Only the advanced traders who recognize the potential problems should think about shorting.<\/p>\n<p>A valuable tool is the \u201cshort ratio\u201d, you can see it specified for each individual stock. The short ratio commonly means how many days the stock needs to cover all the short positions. However, there is another benefit to that figure. It reveals the number of shares that are currently shorted by traders in comparison to the number of shares that are available overall.<br \/>\nHow to get this number?<br \/>\nMultiply the current short ratio by the 30-day average daily volume of stocks.<br \/>\nJust use it as a quick measure of investors&#8217; sentiment towards a stock. For example, a high short ratio usually shows the belief that stock is falling. There are some exceptions, but understanding those exceptions is the key to victorious short selling.<br \/>\nStay tuned!<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Shorting a stock looks very simple. But, this isn&#8217;t a strategy for beginners. By Guy Avtalyon Shorting a stock is when a trader borrows stocks and quickly sells them. She or he does that in the hope that can buy them back later at a lower price and return them to the broker or lender. [&hellip;]<\/p>\n","protected":false},"author":4,"featured_media":5872,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"content-type":"","_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[1016,1012],"tags":[2396,2399,113,2397,363,756,151,2395,104,183,2400,2398],"class_list":["post-5869","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-how-to-master-in-trading-advanced","category-traders-secrets","tag-how-long-to-stay-in-a-short-position","tag-how-to-shorting-a-stock","tag-investing","tag-is-timing-important-for-shorting-a-stock","tag-market","tag-shorting-stock","tag-stocks","tag-tools-for-shorting-the-stock","tag-trading","tag-trading-strategy","tag-what-is-shorting-stocks","tag-who-can-short-stocks"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Shorting Stock is possible because assets can become overvalued<\/title>\n<meta name=\"description\" content=\"Shorting stock is when investor borrows shares, sells hoping he can buy them up later at a lower price, return them to the lender and pocket the difference.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/shorting-stock-explanation\/\" \/>\n<meta property=\"og:locale\" content=\"en_GB\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Shorting Stock is possible because assets can become overvalued\" \/>\n<meta property=\"og:description\" content=\"Shorting stock is when investor borrows shares, sells hoping he can buy them up later at a lower price, return them to the lender and pocket the difference.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/shorting-stock-explanation\/\" \/>\n<meta property=\"og:site_name\" content=\"Traders-Paradise\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/TradersParadisecom\" \/>\n<meta property=\"article:published_time\" content=\"2019-02-07T13:21:43+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2020-07-19T17:53:57+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/02\/shorting-stock-explanation-3.png\" \/>\n\t<meta property=\"og:image:width\" content=\"1600\" \/>\n\t<meta property=\"og:image:height\" content=\"700\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/png\" \/>\n<meta name=\"author\" content=\"Editor\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@Traders_Paradis\" \/>\n<meta name=\"twitter:site\" content=\"@Traders_Paradis\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Editor\" \/>\n\t<meta name=\"twitter:label2\" content=\"Estimated reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"6 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/shorting-stock-explanation\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/traders-paradise.com\/magazine\/2019\/02\/shorting-stock-explanation\/\"},\"author\":{\"name\":\"Editor\",\"@id\":\"https:\/\/traders-paradise.com\/magazine\/#\/schema\/person\/ce94bb3c5a52307ca7be58f0e7b93ffe\"},\"headline\":\"Shorting Stock &#8211; 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