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Strategies & Market Trends : Three Amigos Stock Thread -- Ignore unavailable to you. Want to Upgrade?

To: LTK007 who wrote (8238)	8/31/1998 5:30:00 PM
From: James Wright	Respond to of 29382

I've gotten some PMs asking how to short a stock. I only started shorting last month -- thus, it's new to me. However, here's a brief explanation: You will need a margin account with your broker. You then "sell" shares in a stock which your broker loans to you. You get to keep the proceeds of that sale (minus commissions). However, at some point you will need to pay back the broker for the shares it loaned you. Fortunately, you pay back the loan in an equal number of shares that you borrowed, rather than in money. So when it comes time to "cover" your short sell, you buy back an equal number of shares to give back to your broker. If the shares that you buy back are at a lower price than the borrowed shares that you sold short, then you made a profit. Of course, if buy price is higher than your sell price, and you suffer a lose. Also, your broker can require that you buy back shares to cover the loan at any point, although I'm told this seldom happens. For example: Borrow 1000 shares of ABCD from your broker and sell them at 10 (market price -- although you also can do limit orders). You pocket $10,000 (minus commissions). One week later, you "cover" your loan from the broker. In order to pay back the loan with 1000 shares you buy 1000 shares when ABCD's price is 8. The cost to buy the 1000 shares needed to cover your loan is $8,000 -- which is no problem (hopefully) because you're sitting on $10,000 from the earlier sale. $10,000 minus $8,000 results in a profit of $2,000. Hope this helps. Talk to your broker about the mechanics (for example, you can only short a stock on an up tick, which can be a problem in a rapidly dropping market) and whether you can do this with the type of trading account you have. -- Jim