When the market is falling, investors sell short a stock with the goal of profiting from the fall in the price of that stock. Many beginning investors get confused when they realize that it is possible to make money when the stock falls in price. In practice, shorting a stock is as easy as buying stocks once you get hang of it.

When you short a stock, you borrow it from you broker and sell it with the intention of buying it back at a lower price in the near term future and returning it to your broker. The difference between the selling price and the buying price in case the price goes down is your profit.

With short selling a stock, you make profit when the price of a stock goes down. You are anticipating further fall in the price of the stock when you short a stock. However, if the price of the stock instead of going down starts to go up, you get a loss. It all depends how well your prediction about the stock price was. If you can predict the direction of the stock price very well, you can become a great trader.

Many people are afraid of short selling stocks. They are right to some extent. Theoretically a stock price can go up and up making your loss as big as infinity. In such a scenario, your loss can be infinite. So shorting a stock without proper risk and money management is not wise. However, before that happens most probably you will receive a margin call from your broker that leads to a forced sale before your losses reach unmanageable proportions.

Short selling can play havoc with companies. If there is a short selling attack on a company’s stock by speculators, the company can easily go bankrupt. This is precisely what happened in 2008. Short sellers were responsible for bringing many blue chip companies down. In the stock market crash of 2008, many financial companies went bankrupt due to the short selling of their shares by the speculators. Some people are against the strategy of shorting stocks. A temporary ban was put on shorting for sometime during that period.

In swing trading, we are simply looking to profit from the ups and downs of stock prices. When the price of a stock goes down, short selling is the best swing trading strategy. However, the goal of short selling is not to drive the price of a stock to zero and put the company out of business.

One reason why swing traders love short selling is due to the velocity of the moves! Negative news like poor earning, credit rating downgrade or a poor product launch can bring down a stock price in a matter of minutes and wipe out the steady gains made in months.

Short selling is an integral part of options writing. Short selling is also used in portfolio risk management. Shot selling can be a good hedging strategy for long term investors too. So if you a long term investor, you can lessen the impact of the sharp price drop on your portfolio by using a short selling hedging strategy. Swing traders always look for big winners and this brings them to the short side of the market. When the price of a stock starts to fall, chances are it will fall more before the market stabilizes and the price starts to rise again.

Mr. Ahmad Hassam has done Masters from Harvard University. Try This Cash Printing trading/2009/09/forex-signal-service/">Forex Signal Service From Heaven! Learn Swing Trading!

categories: forex,stocks,mutual funds,finance,investing,business,wealth building,options,futures,ecommerce,market news,trading,day trading,real estate

“Wait! We Need Your Opinion About This Forex Article…That’s What Makes This Site Unique- Your Opinions…” What Do You Think? Rate & Review This Forex Article In The Space Provided Below. Thank You!

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

Related Posts:
**Leveraged Short ETFs  -The ProShares Short Dow 30 ETF (DOG) will return the inverse of the Dow Jones Industrial Averag...

**Stocks Short Selling  -An investor who is short selling is borrowing stocks from the brokers and selling them to anoth...

**Forex, Oil, Gold, Stocks & Bonds (Part I)  -The New York time between 3:00 PM EST to 7:00 PM EST is best suited for scalping with the count...

**Position Trading Explained (Part I)  -Position trading is all about taking a directional market position and holding it as long as th...

**S&P Futures Explained (Part II)  -S&P futures contracts are another example of how 24 hours a day trading enables traders to ...