Shorting stock
Posted By admin on August 28, 2009
Investors looking for a real thrill ride may be interested in shorting stock. Normally you purchase a stock at its current price and then sell it at some future date at an unknown price. You are hoping the future price is higher. Stock exchanges allow you to reverse the process; you can sell a stock that you do not own at the current price as long as you promise to purchase the stock at some future date at an unknown price. By selling now, you have locked in your sales price. You hope that the future purchase price will be lower so you can make profit. For example, if you sell ABC short today for $50, you hope to buy it in six months for $25 realizing a gain of $25. If six months from now ABC sells for $75 and you cover your short at that price, you lose $25.
There are two crucial differences between going short and going long: going short requires going against the will of the vast majority of investors and the potential losses from going short are unlimited.
Most investors are optimists. They believe over the long-term stock prices go up. The financial services industry and the financial press cater to this optimism. There are tremendous commissions, spreads, and management fees to be made from optimistic investors. Best-selling investment books usually spout tales of compounding stock prices turning thousands of dollars into millions. Cautious investors are likely to take their money out of the market, cancel newsletters, and avoid investment books.
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