posted
Can someone explain to me in simple terms Short selling and how a profit is made from it? .. from what i gather/read.. you anticipate/expect prices to go down on a particular stock so you borrow the stock from your broker .. sell it at current market price.. and buy it back cheaply if you were right and prices dropped after you sold it... is that the gist of it or did i get it wrong? ... also would you recommend a beginner to start trading with a account in the $1,000 to $5,000 range so as to not risk too much money to learn the ropes and see if its right for that person? ...
Posts: 4669 | Registered: Mar 2004
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posted
Alright, me and my friend came up with the easiest way to explain short selling. I borrow your car, right. and I sell it for like $5,000. Now I don't owe you 5 grand, I owe you the exact same car right down to the license plate and everything. So I wait until I can buy a car exactly like yours for say 2,500 dollars.
Now I made 5 grand on selling your car, but I owe you a car, so I buy the duplicate one for 2500 and I still have 2500 dollars left over and you are none the wiser. in fact, your car (or stock) just changed value from 5,000 to 2,500 and you just lost 2,500 bucks on paper, but I just made 2500 bucks.
Which proves you can profit even if the market is going down.
short selling is a little bit more tricky tho, because imagine this: I can't find your car for cheaper than 5 grand and I can only find a duplicate one for 8 grand or 13 grand or even 20 grand, then I just lost like 3, or 8 or even 15 grand, because there is technically not limit to the price it can reach, realistically though you can only lose so much money, but you might end up owing your broker more than you have,
Posts: 100 | From: Biloxi, Mississippi for now | Registered: Mar 2004
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posted
oh ok i get it now... so its mainly a gamble.. and you have no way to limit your losses on a short sell? ... would you say you recommend for beginners only long positions versus short positions? ...
Posts: 4669 | Registered: Mar 2004
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posted
Like I said I'm pretty knew too but playing on paper, meaning writing down what price you would pay for it and how many if you were to actually do it and then righting down when you would sell and see if you would have mande money. That is a good way for beginners, but it is not practical because there is no real risk. It's all play money.
You can place a stop loss on a short sell and if it does go up instead of down set a limit for yourself on what price above what you planned to buy it back at. for example you short sell 1000 shares for 1.00 plan to but to cover if it goes to 1.10 so that most you can lose is 100 bucks or ten percent. Get it?
The same formula can be used for long positions as well, if it goes ten percent below your investment price you can have a pre-sale set up. If I had that for SNG, I wouldn't have lost 1200 bucks in a day or something like that.
It makes sense to practice what you preach, I guess next time I will remember that, which proves why I am still a newbie.
Posts: 100 | From: Biloxi, Mississippi for now | Registered: Mar 2004
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posted
oh ok.. sounds like something i wouldnt attempt till i had a few hundred or so trades under my belt.. and enough profits in my account to not be bothered by a loss if prices go up on a short sell ... you didnt use a stop loss on your long position or it just never hit your stop loss yet? .. as for short selling.. wouldnt the original owner of the stock which you borrowed from through your broker be ticked off that he/she is getting their stock back at half the value he originally had it at? (using your example of $2,500 & $5000) ....
Posts: 4669 | Registered: Mar 2004
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posted
yea, but that is the market price of it. What can he do? Besides sell and take a big loss or hold it and wait for it to go back up? Usually it is not that extreme. If you have a thousand cars and sell make 2 dollars on each of them than you just made 2 thousand dollars.
As for my long position. No, I did put a stop loss like I probably...err... definitlet should have. If I would have put a nice ten percent stop loss I could bailed at 2.70 and bought back in with a whole lot more shares at like $1.50 today and I would have already made 20 cents. So I definitley didn;t play SNG like I should have. If you want to know the full story of what I did and what I should have done e-mail me and I will show you what not to do.
Posts: 100 | From: Biloxi, Mississippi for now | Registered: Mar 2004
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posted
Sure what's your email? ... if you do this successfully you'll probably have a nice nestegg for you and your growing family if decide not to re enlist in the Marines...
Posts: 4669 | Registered: Mar 2004
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posted
GENTLEMAN The "MAGIC WORD" is borrow. You must borrow something for this to work and if you are not very careful it will break you same as margin. This is one reason when you fill out a brokerage account app Covered calls is the lowest option trade without margin. The most you can lose is the stock already owned. VAN
Posts: 1424 | From: Peoria, IL. USA | Registered: Oct 2003
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posted
As long as you are responsible there is nothing wrong with using margin and borrowing. Just because you have a credit card doesn't mean you are going to be in debt. Be responsible.
Posts: 100 | From: Biloxi, Mississippi for now | Registered: Mar 2004
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How long have you been trading pennies? And have you been sucessfull at it? I would like to have that full story also. Thanks. Send it to info@aiwebcenter.com
posted
Or, Machiavelli, if you want to limit your loss on a short sale and not be exposed to limitless losses, buy a call on the underlying stock. Going long on a call will limit the risk and is basically like buying insurance for the couple hundred of premium that the call option would cost you. If the short sell moves against you and the stock goes up, the call option goes in the money and offsets the loss. If the short sell moves the way you want, you profit minus the premium of the option.
------------------ David C. Arena
Posts: 28 | From: Westlake, Oh, USA | Registered: Mar 2004
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posted
Yeah i been considering about learning about options too Broker.. any books you can recommend for beginners?
Posts: 4669 | Registered: Mar 2004
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posted
thanks broker... problem is im not very much into E-Books.. im old fashioned in that sense.. i like holding a book in my hands and reading it in bed.. and another problem is my printer is broken so not able to print out anything at the moment.. but ill keep you in mind if i have more questions about Options and ill check out that book on amazon.com you recommended...
Posts: 4669 | Registered: Mar 2004
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posted
As you know, I'm one of the newest members on this board and VERY new to trading, but I recently read that most brokers won't let you place short-orders unless you have a margin account.
As for myself, I think I'm better at picking stocks that tank ;o) Maybe that should be my strategy.
posted
No problem, Mach. I am the same way about the books, I get a headache if I read off the computer screen.
quote:Originally posted by Machiavelli: thanks broker... problem is im not very much into E-Books.. im old fashioned in that sense.. i like holding a book in my hands and reading it in bed.. and another problem is my printer is broken so not able to print out anything at the moment.. but ill keep you in mind if i have more questions about Options and ill check out that book on amazon.com you recommended...
Posts: 28 | From: Westlake, Oh, USA | Registered: Mar 2004
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