Selling stock short means borrowing stock through the brokerage firm and selling it at the current market price, which the short seller believes is due for a downturn. The plan is to buy the borrowed stock back later for less, allowing the investor to keep the difference between the two prices.

Individual investors often avoid this strategy because it involves many practical headaches.

Explore the Risks of Shorting Stock - OptionsHouse

For example, the brokerage firm must approve the account for short sales. Then the position requires establishing an initial margin deposit and a readiness to shore it up whenever necessary. The short seller is also responsible for paying any dividends that occur during the time the stock is borrowed.

And if the stock becomes involved in a takeover transaction or undergoes a volatile period for any reason, it might increase the likelihood that the stock lender will demand the return of the stock. Covering the short means buying the stock at the market price, even if it results in large losses.

Though the strategy does not involve a formal timetable as an option does, it may not be realistic to expect to be able to hold the position indefinitely. The investor is obligated to cover a short sale on very short notice, if asked. The strategy involves borrowing stock through the brokerage firm and selling the shares in the marketplace at the prevailing price.

The goal is to buy them back later at a lower price, thereby locking in a profit. Bearish investors sell stock short primarily because they consider its market price to be significantly overvalued and due for a correction.

If it remington stocks market a standalone strategy no other positions in the underlyingthey are placing a great deal of capital at risk, so typically the opinion is online books on forex trading held.

The maximum loss is unlimited. The worst that can happen is for the stock to rise to infinity, in which case the loss would also become infinite.

Whenever the position is closed out at a time when the stock is higher than the short selling price, the investor loses money. The short seller does not amibroker stock quote downloader to see the stock rally.

In addition to margin issues, the short seller has to be concerned about the stock lender asking for the stock to be returned. If the stock rallies sharply say, because of an acquisition rumorthere is an even greater risk of the owner demanding the shares back. Covering the short at such a time quick forex profits download result in large losses.

The best that can happen is for the stock to become worthless. In that case, the investor can theoretically buy back the stock at no cost, return it to the stock lender, and keep the full initial short sale price.

Those gains are reduced by any dividend payments owed while the short stock optionshouse stock position is held. The potential profit is substantial. If instead the stock unexpectedly rises, potential losses are unlimited. This strategy breaks even when the stock is trading at the price received at the time of the short sale.

However, if the stock becomes more volatile, it increases the potential for larger losses as well as larger profits. Likewise, it affects the likelihood of having to meet margin calls. The chances of being asked to return the stock and cover the short position might increase, too. You will recall that the cost to carry a long stock position is a factor in that strategy.

Likewise, cost to carry also matters in selling stock short, but the effect is the opposite. Short selling requires prior arrangements and a complete understanding of processes, rights and responsibilities.

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