Wednesday, October 3, 2007

Stock Trading - Short Selling Stocks

The stock market has become the venue for millions of Americans who have learned to manage their own portfolios online. For those who do their homework, the profits can be staggering! As a trader myself, I would also have to say that online trading is very enjoyable. It's as much as a hobby as it is a way to compound funds. Setting aside an hour a night to scroll through charts and assessing the psychological mood of each equity searching for that one stock that exhibits the telltale signs of a stock that has come to a top and is ready to drop in price really gets my heart pounding. That might sound contrary to conventional wisdom but it's what many traders have come to know as quick profits. While most investors are looking for the price of a stock to rise, some savvy traders are quite content finding a stock that is poised to drop like a rock. Who are these traders? They're called short sellers and they have discovered what seventy five percent of average investors have yet to find out.

Selling a stock short is the exact opposite as buying and holding stock. It's profiting from a stock falling in price rather than the more traditional method of buying stock and profiting from the share price gaining in value. When one sells short they expect the share price to lose value and profit from the decline in price. Why would a trader want to sell a stock short? Well, one reason is a stock will drop in price about three times faster than it took to increase in price by the same amount. That equals faster profits. Another reason is traders can take advantage of all the moves a stock has to offer. Many stocks run in cycles due to various economic and seasonal conditions. Taking advantage of the advances in share price, as well as the declines offers the traders more opportunity to profit.

When a trader decides to trade stocks short they must open a margin account. When you sell a stock short, you are actually borrowing the shares from your broker. You are selling shares of stock you don't actually own. Let's say the current market price of ABC Company is selling at $25.00 a share and you believe the price of the stock will decline over the next several weeks. You borrow one hundred shares of ABC and sell them at $25.00. Since you've done your homework correctly, you watch as the price of ABC drops to $19.00 a share over the next several weeks and you decide to take your profits. To close the short trade you buy the shares back at the lower price of $19.00, satisfying your debt of one hundred shares of ABC to your broker. But instead of paying them back at $25.00 a share, you are paying them back $19.00 a share. Your profit is the difference of $6.00 a share, or $600.00.

The next time you see your stock running out of steam; don't just sell the stock to profit from the advance. Try selling the stock short and reap the rewards of a falling stock price as well. It's just as easy and many times twice as exciting!

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