ADVERTISEMENT
Headerlg_ask-an-advisor
Headerlg_ask-an-advisor

How risky is it to short a stock? Comments

  • By Jocelyn Black Hodes, DailyWorth’s Resident Financial Advisor
  • April 29, 2013

Is "shorting" a stock something that an average person could do, if they had the feeling that a certain stock's value was going to decrease? I've heard that people can make a lot of money doing this, but how does one go about doing it? Do you have to work in finance or have money invested through an investment firm or hedge fund?

Elisabeth, New York, NY

Short selling, or "shorting," is not something that most people should do, simply because the risk it too great. It requires opening a "margin" account at a brokerage firm with a minimum initial deposit of at least $2,000 (sometimes more). Some firms even require you to have a minimum net worth and amount of years of investing experience to open a margin account.

Once you have an account, you can bet on the decline of a stock by borrowing shares that you don't own from the firm and selling them. If the stock price does in fact fall, you can then buy back shares at a discounted price and make a profit; if you are wrong and the stock price rises, you are exposed to potentially unlimited losses. Meanwhile, as long as you are betting you have to pay the firm interest for the loan at a rate which fluctuates. I would advise only trying this strategy with discretionary cash that you can afford to play with and lose.

You might also like:
Should I buy gold? 
Mutual Funds vs ETFs
How do you invest your money?

ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT

© Copyright DailyWorth 2014