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How do I short a stock?

I've heard some people talk about making money by "shorting" Facebook, is this something I should look into?

May 23, 2012 by Karl from Manhattan, NY in  |  Flag
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4 votes

Too risky. I'd forget it, unless you already own the shares you're shorting. It's called 'shorting against the box'. You already own 100 shares of XYZ and think it will go down. You do a short-sale of 100 shares of XYZ. If you're right, you buy for delivery and make money, still owning your original 100 shares. If you're wrong, you deliver the 100 shares you already own. Frankly, it's gambling. Vegas is more fun; the shows are better, and there are some great restaurants. Someone once told me, if investing starts getting to be fun, you know you're doing something wrong.

Comment   |  Flag   |  May 23, 2012 from Moorpark, CA

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4 votes

There is nothing "wrong" with shorting a stock, so long as you understand the risks involved. When you short, you are moving out of the territory of investing and into the territory of trading, and it is a different mentality. Here are a couple things to consider:

  1. Remember, the most stocks follow the general direction of the market, and the market has an upward bias over time. Most of the time shorting is a losing proposition, so choose your shorts carefully.

  2. When you short, more often than not you are swimming against the current. When you win, by definition most others are losing. Don't expect to be liked or appreciated. And win you lose, don't expect sympathy. Shortselling is a lonely affair.

  3. Try to stay cool and dispassionate. As they say in the Godfather, "it's just business." I've seen shortsellers get emotionally caught up in their shorts, and it usually doesn't end well. "Hating" a stock won't make it fall in value. It just causes you to lose focus and make poor decisions.

  4. Don't spent too much time with other shortsellers. Like gold bugs and political ideologues, investors who spend too much time trading the short side of the market tend to develop a warped view of the world. It's not healthy for your investment performance or for your mental health. I find the negativity has a way of spilling over into other areas of your life.

  5. Finally, risk management is everything. When investing for the long haul, timing isn't critical. Buying a good stock at a reasonable price will get you a fine return over time. But with shorting, timing is everything. You can be "right" about a stock being a good short candidate and still lose a lot of money in the short term. Figure out how much risk you are willing to take before getting into the trade. If you take a small loss, you can always try again later.

Comment   |  Flag   |  May 29, 2012 from Dallas, TX

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3 votes

Shorting a stock means selling it, say at $100, when you don't own it so that if it declines in price you can purchase at a lower price, say at $60, thereby making $40 less transaction costs. Costs include the interest your brokerage account will be charged for lending you the stock. You are borrowing the stock.

If you are absolutely sure Facebook or any other stock will decline in value, then shorting could work out for you. However, the "absolutely sure" part is tough unless you have private information and analysis that lead you to that conclusion. When inside information leads investors to the conclusion that prices will decline then they are violating securities laws and could face prison time if caught.

It would be much better to spend your time, in my opinion, figuring out how to create a diversified portfolio that funds your needs. As a part of that process, you would be considering your human capital or lifetime earnings from work, your spending needs and desires, and stomach for risk. This is work but will payoff in many ways.

Shorting any stock is really speculation. There are more productive uses of your time than that. Hope this helps and sorry for getting on a soapbox.

Comment   |  Flag   |  May 23, 2012 from Ridgefield, CT

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2 votes
Don Level 19

As for the "how" you need to open a Margin account with your broker. The broker will likely ask you to affirm that you have some amount of investment experience and tolerance for risk. You will also need sufficient collateral (investment balance) with that broker.

Comment   |  Flag   |  May 23, 2012 from Middlebury, VT

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George Cones, JD Level 20

You short a stock with extreme caution. The risk of loss on a short-position is theoretically unlimited. There are ways to use short positions as hedges, but know your risks before you act.

Comment   |  Flag   |  May 23, 2012 from Wilmington, DE

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0 votes

Only if you can afford - and are emotionally prepared - to lose what you put . Shorting any one security is very risky.

Comment   |  Flag   |  May 23, 2012 from Port Washington, NY

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