Sunday, November 19, 2006
Selling short is a way to make money when a stock goes down. It reverses the order of buying and selling. Normally you buy a stock and later sell it for more. On a short sell you actually sell a stock you don't own with the idea that you'll buy it later at a lower price to pay it back. To give you an example of how this works, suppose I'm a car dealer and you want to buy a car from me and I'm out. However, a friend of mine has a brand new car in my shop so I borrow his car and sell it to you. Then before he gets back my new shipment comes in and I give Bob a new car. Because I borrowed Bob's car, I sold a car I didn't own and bought a replacement later for less.
Selling short is selling now by borrowing stock and selling later. When you sell stock you don't own it ties up money until you buy it back. The amount it ties up depends on the stock price. If you're on margins you can sell short twice as much as your cash reserves. Again keep in mind there are interest costs. You're betting the stock will go down. If you're gambling on the wiggles, you can make money on both sides of the wave.
Selling Short is a lot more dangerous than buying stock. When you buy stock if it goes to 0 you lose it all, but no more than all. And you can make an unlimited amount if it goes up. On a short sell if it goes to zero you double your money. But if it goes up you lose money and you can lose an unlimited amount of money. You can lose more than 100% by selling short. On a market that tends to rise overall selling short is swimming against the current. And even if you win 50 times in a row selling short, the one loss could easilly wipe out more than 100% of your money. You may be trading a real dog of a company and all of a sudden some big company buys them out and they tripple overnight. Not only does this wipe you out but you are in debt and all your previous winnings count against you because you used these winnings to sell more shares short.
Unless you're a lot smarter than I am, don't sell short. It's just too dangerous. There are safer ways to make money on stocks going down. You can buy PUTS which limits your losses to what you invest and has the ability to return more than double you money.
Tech stocks and the internet are the future. Most all the Fortune 500 are nerds. Computers, networking, and communications are the fastest growing stocks out there. not all are winners, but most are. You can invest in big solid companies like IBM, Cisco, Microsoft, Dell, Compaq, WorldCom and do well. I like to try to find some good startups that are well positioned because you often get more growth buying a calf than a cow. Several friends got in early with Qwest. Qwest was a company laying high speed fiber optic cable all over the country putting in the latest in high bandwith fiber and routers. How can you not make money doing that?