Home  Stocks and Mutual Funds Before Short Selling-Know These Shocking Facts
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Before Short Selling-Know These Shocking Facts |
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Written by AhmadHassam
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Saturday, 06 March 2010 |
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Short selling is one of the favorite day trading strategies employed by many day traders. Many companies hate short sellers as they believe that short sellers were responsible in the fall of their stock prices. Nothing can be far from the truth. Short selling is just like anyother market mechanism that provides liquidity and better price discovery. Short selling can never destroy a company if its' fundamentals are strong. Many stock brokers now let you short stocks with just the click of a mouse. When you sell stocks from your online brokerage account, the message asks you whether you are selling your own shares or short selling. You just need to click once on short selling and the rest is taken care of by the broker. These shares are a loan to you by the broker that you will have to return at a later date!
by AhmadHassam
Short selling is one of the favorite day trading strategies employed by many day traders. Many companies hate short sellers as they believe that short sellers were responsible in the fall of their stock prices. Nothing can be far from the truth. Short selling is just like anyother market mechanism that provides liquidity and better price discovery. Short selling can never destroy a company if its' fundamentals are strong. Many stock brokers now let you short stocks with just the click of a mouse. When you sell stocks from your online brokerage account, the message asks you whether you are selling your own shares or short selling. You just need to click once on short selling and the rest is taken care of by the broker. These shares are a loan to you by the broker that you will have to return at a later date!
In some cases,a stock gets so much shorted that there are no more shares of that stock left for you or your broker to borrow anymore. Now, you cannot always short a stock instantly. Most of the investors work on rumors. In that case, you simple will have to cross your fingers and see how the other short sellers do on that stock while you search for another stock to short!
Day traders are not looking for long term fundamentals in order to go short. A day trader might go short on a stock that had go up for three consecutive days, figuring that they will go down on the fourth day. Day traders are only looking for stock that might go down in price for mundane reasons.
You have to be careful about the uptick rule as stock exchanges have rules in place to help maintain an upward bias in the stock market. What this means is that you can only short a stock when the last trade was a move up. In other words, you can't short a stock that is moving down.
How much risky short selling can be? Well, in theory there is no stopping a stock price to reach the sky. So if you are wrong in your short selling decision, your loss can be catastrophic. But don't worry, short sellers also use stop loss so if the price starts to move up, your position will get closed automatically by the stop loss order.
There is something known as Short Squeeze. A short squeeze happens when the stock of the company that you have shorted has some good news that drives the stock prices high. Now if this happens, many short sellers might lose money and even get margin calls. When they get desperate to buy back the stock, its prices go even higher hurting them more.
Now many companies, brokers and investors hate short sellers and try tactics to bust them. Sometimes, they will issue good news or spread rumors of good news to create a squeeze. Other times, they can ask the stock holders collectively to tell their brokers not to loan out their shares. What this means is that short sellers have to buy back the shares and return them to the brokerage firm and close their short positions even if it does not make any sense.
About the Author:
Mr. Ahmad Hassam has done Masters from Harvard University. Read this 49 page Quantum Swing Trading FREE Report plus the shocking Profit Button Report that applies no matter what you trade-stocks, forex, futures or options! Turn $200 into $100K in just 3 months with this Penny Stock Trading FREE Report!
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