Shares sale - How to make a short sale

Shares short sale: How to make a short sale

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In "The Big Short", hedge fund managers Michael Burry and Steve Eisman correctly predicted the collapse of the US housing market and used investment vehicles called credit default swaps to bet against mortgage-backed securities.

This bet is the aforementioned "big short" - an investment that makes money when the price of a security falls. Most investors buy shares in companies they believe in, hoping to make money on their future earnings.

Short sellers do the opposite, borrowing shares to bet against companies they believe will fall. But short selling is not so cut and dry compared to buying - especially when it comes to the risks.

Introduction to short selling stocks

Usually, shorting a stock goes like this: You identify an overvalued security and want to take an opposite position. To do this, you do not buy the stock outright, but borrow the stock from your broker and sell it immediately.

At some point you will have to return the stock to your broker, but you anticipate that the stock price will be much lower at the time of settlement (this is called covering your short sale).

If the stock you borrowed goes down 10%, you can buy the shares on the open market and return them to your broker. You have now made a 10% profit on the trade - the difference between the price you sold the borrowed shares for and what you paid when you returned them to your broker.

Shorting shares requires a margin account because you need your broker to lend you the shares in the first place. Borrowing shares from your broker involves the same terms as borrowing cash, including interest payments.

(Note: You can also bet on a share being declined by buying put options. A put option is an agreement to sell a particular security at a predetermined price on or before a specified date. Options do not require a margin account, but they do involve leverage, so make sure you understand how they work before trying to sell a stock this way).

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Steps to selling a stock short

Here are the basic steps for shorting a stock:

  •     Check to see if shares are available to borrow (usually a share is flagged if it is hard to borrow - HTB - but different for each broker).
  •     Place a sell order for the share you want to short.
  •     Buy back the shares at a lower price for a profit or at a higher price for a loss.

With, it has a couple of stock symbols. The image below shows a red "T" in the upper right corner, this means there is no stock and the stock cannot be shorted.

See a grey "L" in the top right corner. This means you need to request a location from your broker to see if stock is available. Sometimes you have to pay a fee to borrow the shares, especially if they are hard to borrow.

Remember that this can vary from broker to broker. So make sure you contact your broker's customer service department to get a full understanding of how the short sale process works.

Important Note - Shorting stocks can ONLY be done on a margin account and if you hold a short position overnight, you will be charged interest based on the amount borrowed. If you trade them on the day, you will not be charged interest.

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