To: gambler who wrote (1044 ) 6/4/1998 8:14:00 PM From: The Perfect Hedge Respond to of 44908
What does "shorting" a stock mean? What does shorting stocks mean? Shorting stocks is a method of gambling on a stock whose price you think will decline. Instead of purchasing shares of a stock you think is going up in price, you instead borrow shares, sell them immediately, wait for the price to go down, and then buy them at the lower price and return the shares to the broker. The advantage of shorting stocks is that you can make a profit without an initial cash investment. For example, suppose you think the price of NOPE stock is going to go down from its current price of $32. You tell your broker that you want to sell short 200 shares of NOPE stock. (You must have a margin account to short stocks.) Your broker then borrows 200 shares of NOPE and sells them for you, depositing $6400 in your margin account. Now you hope that the price goes down because eventually, you need to return the 200 borrowed shares to your broker. Suppose that the price does go down to $25. You can now buy 200 shares of NOPE for $5000, return the 200 shares to your broker, and pocket the $1400 profit ($6400 -$5000) minus the commission. You've made money without an initial cash investment. However, shorting stocks is considered riskier than buying stocks because the stock of the price could go UP an unlimited amount, resulting in unlimited losses. At some point, you need to buy the shares you borrowed to short the stock. For example, if the price of NOPE goes up to $40, you would have to pay $8000 to buy the 200 shares owed to your broker. In this case, you would lose $1600 ($8000 - $6400) plus the commission. Because shorting stocks involves an unlimited risk, the SEC has special regulations requiring brokers to issue a margin call when and investor's losses reach a certain amount. [copied from quicken] B