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Strategies & Market Trends : Shorting stocks: High fliers
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To: Mr_Merck who wrote (649)1/31/1999 2:38:00 PM
From: Dale Baker   of 709
 
When you short the stock, you don't own it - you have borrowed it and SOLD it. If you short 500 shares at 10, you eventually have to return 500 shares to the broker you borrowed them from, i.e. you will have to buy them in the open market (since you already sold the shares you borrowed).

If that stock goes to 9, you can buy the 500 shares to return to your broker for only $4500 instead of the $5000 you sold them for. Hence your profit is $500 minus commissions. If the stock went to 11 instead of 9 and you decided to cover there, you would pay $5500 to replace the original $5000 of stock, so you lose $500 plus commissions.

There are three important differences between going long and going short:

1) You have to borrow shares to short. If you can't borrow any, you can't short.

2) When you are short a stock with a small float and a lot of shares already shorted, you can get caught in a short squeeze. The stock moves up and everyone who is short starts to buy back shares to cover. That accelerates the upward move and increases the panic among shorts. Many Internet stocks have gone up by hundreds fo dollars largely due to short squeezes.

3) Because a stock can only go down to zero but up to infinity, your potential shorts losses are UNLIMITED, while long losses are limited to 100%. If the stock you shorted at 10 goes up to 30 you are down 200%.

I would advise not shorting stocks until you thoroughly understand these basic principles. Good luck.
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