Short Selling is a type of reverse stock buying. The reason it is also referred to as reverse stock buying is that people sell stocks before they actually buy it. The stocks are sold because the people assume that they will go down in terms of price. Short selling can be termed as the selling of a security that either the seller does not own or the seller has borrowed it from the actual owner. But the main reason for selling the stock short is because the seller thinks that the price will go down and hence they would be able to buy it a much lower price so that they can generate a profit out of it.
Selling short stocks can be quite tricky as a lot of risks are involved. It can plunge people into debt because of taking a wrong decision in terms of the short bet they made. Therefore, people should be aware of the factors that need to be considered while selling short stocks. Some of the factors and risks involved in selling short stocks are mentioned below:
- The first rule that everyone needs to keep in mind is that they should avoid bull markets. If anyone is planning to sell their stock short in the bull market then they will generate more losses than profits. Under the bull market, the seller of the short stocks would have to compete with the general market due to which the chances of an increase in the stock that the seller has shorted also increases. The increase in the short stocks means that whatever amount of money you have generated is a loss and not a profit. Hence the short selling should be done mainly in bear markets rather than in bull markets as that way people can generate more profits than losses.
- The second factor that needs to be considered during short selling is that sellers should avoid selling a very small number of shares stock short as they can bring along damage to the seller. It is quite easy for huge and big institutions to come up and take a position in the stock. The position can be small or big but in both the cases, it would have an impact on the overall short selling.
- The third factor that should be considered is that the advancing stocks should not be included in short selling. Advancing stock might force you to sell short, as the prices seem quite high comparatively. But one must not forget the fact that no one knows that whether the stock is at its high price or not. Maybe the price has to increase more than the current price. The sellers should keep a check on the trends of the market within which they are operating and within which they are planning to sell their stocks short.
However, after all the above factors are considered in a greater depth and detail then the following steps can help the people to sell their stocks short. The following steps can help them answer their queries about how to sell short stocks:
- The first step involves the borrowing of the stock that the seller wants to place a bet on.
- The seller then sells the shares they have borrowed after they have placed their bet on it.
- Now the seller has to wait for the time when the stock starts to fall. Once the stock starts to fall the seller has an increased opportunity to buy the stock at a lower price, which means that the seller has made a profit.
4. The last step is to return the shares back to the brokerage and pocket out the difference.