Going Short, Baby?
Taking short positions is definitely for the more advanced investor / trader. Chances are if you’re serious about trading, especially day traders, you will be doing MANY short positions.
What is a Short Position?
It is the exact opposite of going long. Instead of hoping the instrument you are looking at will go up in price, you’re betting it will go down.
News just hit the stands – 5 Dead From Drinking Monster (MNST) Beverage
Chances are, with stock news (real or not) like these, this company is going to go down in price. So instead of waiting for it to recover, traders go short and make buckets of cash on negativity.
So here’s the tricky part. How far down will it go? With shorts, as with longs, it’s really hard to tell. But even harder with shorts cause no company wants to keep bearing the bad news. They will do what they can to fix things.
4 Tips for Going Short
1. Always, ALWAYS, set stops (this will be higher than the price you got it at). Probability of a company going up in price is more likely than going down.
2. Always set targets – this is where you want to get out (a lower number than the stock price you got it at).
3. This is short term trade (very short term five minutes – three days)
4. Not all companies offer shorts – so if you go short and nothing happens, chances are the amount of shorts that were available are sold out, or there simply wasn’t any to begin with (this mainly happens with penny stocks).
Now for the complicated explanation (in my opinion not very important, but needs to be explained)
Here’s the situation, when you go short, you are not buying stocks or equities. Nothing at all exchanges hands. You are not a share holder. Actually, you are literally borrowing shares from people who already own them (that are sitting in long positions) or brokers and selling them.
When you go into a short, you actually press the sell button rather than the buy button.
I know, it’s really complicated when I explain it this way.
So what the person who is taking a short hopes is to cover the price when they buy the stock back at a lower price. Hence, the profit.
Whatever the explanation you find and read, the bottom line is – you want to make money while the company plummets.
Marina 'The Trader Chick' Villatoro