Article Shorting Stocks – The Basics

T2W Bot

Staff member
1,459 60
What does it mean to short a stock?This means that you borrow the stock from your broker to sell to a third party. The idea is to buy back the stock at a lower price, returning the shares to your broker while leaving the remaining cash in your account as a profit. Put another way, a short seller does not own the stock before they sell it. Instead, they borrow it from another investor who already owns it. At a later date, the short seller buys back the stock they shorted and returns the stock to close out the loan. If the stock has fallen in price since they sold short, they can buy the stock back for less than they received for selling it. The difference is your profit.
Short selling is a transaction made on margin. This means that you must open a margin account to sell short. Most online brokers allow you to open a margin account if you qualify according to their rules and regulations. Criteria related to minimum balances and cash reserves may apply. You will sign an...
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pssonice

Established member
900 12
no word about of what is triggering a short signal most : put/call ratio
the author is offering this a "BASICS".
the author is discussing the average forces which might impact a short fall of a stocks. These issues arent basics.
this is poor to medium abstract about what might happen if u sell a stock wo owning it. I rate such kind of articles to a kind of abstract.
DNDN is a nice example of what might happen if a short squeeze is pulling a stock share to the upside. Taken this is example into account will enhance this article to medion quality
 

LION63

Established member
746 33
I was under the impression that shares can be shorted by using options; CFDs and spread betting. I would have also thought that these methods are safer and require much less capital.

In the case of options, the absolute downside is known from the outset and the cost to the trader is miniscule compared to borrowing the stock via a broker.

CFDs and spreadbetting are probably the cheapest and simplest methods of shorting stocks available to Joe Public and there is always the option of capping potential losses from the outset.
 

fibonelli

Experienced member
1,338 288
Good article.
However, there is no mention of bid speculation or bid as a major threat when holding short positions.
In other words, a short seller should evaluate of the probability of a bid and a rough estimate of the likely takeout price.
 

_coda

Junior member
45 5
Some questions that arise from the article...

"... eventually you will have to cover your short ..."

Q1. Is a short position of arbitrary duration, or can (or must) one specify the duration for which it will be held? Assume that the margin cover is in order.


As I understand the transaction, the broker will either already have the stock available, and if not, will borrow the stock from a third party. The stock will be sold according to the uptick rule, and then immediately repurchased.

Q2. Who would the third party typically be here?


Q3. Does the stock now get set aside for the duration of the short position so that the same stock could not be used for another short position?

I am curious about the requirement to pay a dividend when holding a short position and whether there is some kind of double dividend being paid out as a result.


Q4. For bonus points. Is it possible to track short positions being held in the market? One could see Broker X sell volume V and then immediately buy volume V back. Do short positions actually get tracked / reported somehow?
 

Rhody Trader

Senior member
2,620 264
Q1. Is a short position of arbitrary duration, or can (or must) one specify the duration for which it will be held? Assume that the margin cover is in order.
No, you don't need to pre-specify how long you will be holding your short.

As I understand the transaction, the broker will either already have the stock available, and if not, will borrow the stock from a third party. The stock will be sold according to the uptick rule, and then immediately repurchased.

Q2. Who would the third party typically be here?
There are institutions which operate as custodians from which brokers and such are able to borrow shares - for a fee, of course.

P.S. The uptick rule is history.

Q3. Does the stock now get set aside for the duration of the short position so that the same stock could not be used for another short position?

I am curious about the requirement to pay a dividend when holding a short position and whether there is some kind of double dividend being paid out as a result.
You are correct that the same shares may not be shorted twice.

As for the dividend, it goes to the shareholder of record. When shares are shorted, either the original owner or the recipient of the shorted shares is the holder of record, not both. I'm not sure which, but I'm thinking the original maintains official ownership. The shorter then compensates the other.

Q4. For bonus points. Is it possible to track short positions being held in the market? One could see Broker X sell volume V and then immediately buy volume V back. Do short positions actually get tracked / reported somehow?
Yes. There are short interest figures. You won't be able to track them in real-time, but they are reported on a regular schedule.
 

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