One of the most important tools in any investor’s arsenal is the ability to determine and correctly predict where the stock prices are going before they happen. This is called the “Pipeline”. But there’s much more to it than that. The average investor usually doesn’t have a clue as to what is actually happening with the companies whose stocks they hold. That’s where the need for a short sell specialist arises.
The reality of the situation is that no investor, even a professional who has years of experience, can anticipate the direction a stock price will move in just a few days or even hours. But that doesn’t mean that they shouldn’t use a bit of time on a daily basis to become familiar with the trends that affect stocks. Short selling is one such tool. It involves borrowing stock from a broker and selling it short. The difference between the value of the stock and the sale price is the “profit” that the short seller made.
So what exactly is a short sale? How to short sell a stock when trading falling markets? Well, to put it in a very simple term, the short seller makes a profit by selling a stock at less than its value. You can think of it as borrowing stock from a broker and paying it down. Or, you could think of it as buying stock from a broker at a discount and then selling it to a short seller at a discount.
There are several reasons why a company would offer a short sale. Sometimes, a company can’t keep up with interest payments to its own employees. At other times, a company can get caught in a real financial crisis and may have to sell off assets to cover its obligations. Still other times, a stock that was once hot may suddenly drop in value because of illiquidity in the market. Whatever the reason, short sales often give the savvy investor an excellent opportunity to scoop up a bargain stock for a deep discount.
As with all stocks, there are two main categories of short sale transactions: short term and long term. In a short sale transaction, the investor is usually not in debt, so the transaction is referred to as a “short” sale. In a long sale transaction, on the other hand, the stock or shares being sold are actually in debt, so the transaction is called a “long” sale. Either way, the stock or shares being sold have been offered for sale under the provisions of a contract – either between an individual or an entity – and the stock has either closed at or below the value determined in the contract.
One of the main differences between the two is the length of time the investment will take to pay off. In a short sale transaction, investors in the stock or share will reap profits within a short period of time. The downside here is that the stock will probably be worth significantly less than the amount owed to the seller when the deal closes. Longer-term transactions, meanwhile, will take a while longer to pay off, but can net out in profit over time.
When learning how to short sell a stock when trading falling markets, it’s important to remember the risk involved. This is especially true in cases where the stock has dropped to a price point below what was expected. Doing so can result in significant losses. To avoid taking financial damage, it’s best to do research and know what the market may decide to do next before putting one’s money at risk.
Investors who are learning how to short sale a stock when trading falling markets should also be aware that this option is not available for everyone. Short sales require the approval of a stock market broker in order to go through. There are some stock brokers that will allow a client to make the trade, but won’t guarantee a profit in return. It’s best to ask around before deciding on this practice.