Shorting a Stock is the simple process of borrowing a stock from your broker and selling it on the open market. Then you can buy the stock back and return it to your broker at some point in the future. This allows you to profit from a falling stock, which is good considering that stocks don’t always go up.
But before you consider shorting a stock there are a few things you should know about it first. Below is a short list of things to know about shorting stocks
1. Can Be Good To Increase Your Profits
Fear and Greed were the causes of the Great Depression and they affect the stock market today as well. Likewise the market will always have major ups and downs. If you only know how to buy stocks then you are only using one side of the equation.
Short selling may take a little bit more skill to master then buying stocks, but they can also be vastly help you to increase your returns over the long run.
2. You Do Have to Pay Dividends
Brokers do not mind lending you their long term stocks. But this doesn’t mean they are willing to give up the benefits of holding those stocks, such as dividends. When you short a stock you have to pay the dividend.
Keep that in mind if you are investing into dividend paying stocks which would have normally pay out a lot of money to the broker in cash flow that you will have to pay it instead. Some stocks are worth staying away from just for that reason.
3. Fast Moving
Another thing to remember is that shorting is a short term investment strategy. While stocks do go up and down they also tend to go up over the long term. Therefore shorting is a short term strategy. If you want to make money by shorting a stock you have to be accustomed to getting in and out of trades relatively quickly and cutting your losses short before any potential loss you do have is not going to break your account.
