What Is Short Selling?

The most well known way to make money on the stock market is to buy a stock hoping it’s price will go up so that you can sell it for a higher price and make a profit. That’s pretty easy for people to understand. On the other hand short selling is selling a stock (that you don’t actually own) hoping that it will go down in price so that you can buy it back at a cheaper price and make a profit. This process is quite a bit more confusing to most people.

Hopefully with an example it can become more clear.

If you had “shorted” 1000 shares of DRYS at $7.30 on Friday you could have “covered” it for $6.10 yesterday for a profit of $1.20 per stock, in this case that would be $1,200.

But what if things had gone differently? What if DRYS had shot up to $10 yesterday? If you would have covered it at that price that would have meant a loss of $2.70 per stock or $2,700.

Everything is reversed with short selling. When you go long your potential losses are what you put into it (you can’t lose more than you start with) and your potential profits are theoretically unlimited. The reverse is true with short selling. There is no theoretical limit to how much you can lose but the most you can profit is 100% (you can make many times more than $100 when going long.)

When you look at it like that it doesn’t make much sense to short sell, does it? But there are some positives too. With short selling you can make money even when the market is headed down (in particular when the market is headed down in fact.) If you only go long then you may find it hard to make a profit when the economy is in recession.

A great example of that is how well Timothy Sykes has done since the stock market started headed south. While others have lost a great deal of money over the last 7 or so months, Sykes has made a bundle. And he makes most of his stock market fortune these days with short selling (although he also goes long on occasion.)  Sykes has a great deal of educational material available and a stock pick newsletter (which he sends out every morning at about 2 or 3 AM, I know because I get it) that you can sign up for. He tells you every trade he makes as he makes it and almost every trade he makes is a winner so it’s obvious how that information could be very valuable to you. CLICK HERE to learn more.