by Michael Shulman 07/03/08
A short position is an investment that generates a profit if the market, a market segment or a company's stock goes down. There are many ways to "go short":
Shorting a Stock
On Wall Street, the expression "short" has historically meant shorting the stock. This happens as follows: You learn that the ChangeWave Alliance has survey results showing that Dell (DELL) will soon lose market share to Hewlett-Packard (HPQ).
Suppose Dell is selling at $40. You call your broker and "borrow" 500 shares of Dell and immediately sell them. Yes, sell them. The money from the sale is placed in a margin account by your broker.
Seven weeks later, the company announces it is losing market share and the price of the stock goes to $30. You buy 500 shares at that lower price, re-pay your broker, and keep the $10 difference between the price of the stock when you borrowed it and the price of the stock when you re-paid the loan.
You have a 25% profit in seven weeks, minus interest costs on the loan of borrowed stock.
Do you think a stock is about to go up? You can buy call options or sell put options, as both indicate that you're making a bullish bet. But how you get from Point A to B is quite different.
Live Well, Thanks to Dying Companies
If you don't want to buy a company's products or services, you shouldn't buy its stocks.
What to Know When Making a Short Trade
Do you know what the trading issues are when shorting a stock? Don't get blindsided with shorting.
Going long, buying puts, selling shorts -- all of these can be confusing at first. But there's hope!
