When watching a sports game, would you bet on who’s going to lose?
That’s essentially what “short-sellers” do: they bet that a stock, sector or broader benchmark will fall in price. (“Long investors” bet that prices will rise.)
Here’s a simplified example of how shorting works:
Say you think Company ABC is overpriced at $50 a share. You borrow 100 shares from your broker—pay interest on the loan—and sell them for $5,000. Time ticks on, and as you suspected, the stock price falls. At $40 a share, you buy 100 shares for $4,000 and return them to your broker. You walk away $1,000 richer, minus investing costs.
That’s a successful short. But what if the stock gains in popularity? Say the price rises to $60 a share, or $6,000 for those 100 shares you need to return. You’re out $1,000.
Shorting, in short, is a strange transaction. You're selling something you don't own. And the goal is to sell high and then buy low, says Ryan Bend, co-portfolio manager of the Federated Prudent Bear Fund (BEARX), as opposed to the common game plan of first buying low then selling high.
Companies—and ultimately governments—get cranky when lots of folks bet on a downfall. Struggling Greece, for example, actually banned short-selling temporarily.
You probably don’t need to be dancing around in your undies to know that this is, um, Risky Business, and not right for most individual investors.
|
Brokerage Products: Not FDIC Insured • No Bank Guarantee • May Lose Value |
The content in this website with the exception of that provided by Charles Schwab have been provided by third-parties and/or prepared by DailyWorth who is not affiliated with, associated with or endorsed by Charles Schwab & Co., Inc. (“Schwab”). Therefore, the information contained within the content of the website that has not been prepared by Schwab should not be considered as approved, endorsed or recommended by Schwab. Schwab does not guarantee that the Information is accurate, complete or timely, nor does Schwab make any warranties to you regarding any results from using the Information. This also includes any links that DailyWorth provides as a courtesy to users of their website to third-party websites. Third-party websites are owned and operated by independent information providers (“IIPs”).
Interviews with Schwab employees created by DailyWorth are for general informational purposes only and should not be considered an individualized recommendation or investment advice. Investing involves risks, including the potential loss of principal invested. Keep in mind that diversification strategies, do not ensure a profit and do not protect against losses in declining markets and may not be suitable for you.
The content provided by Schwab is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab suggests that you seek professional assistance.
Charles Schwab & Co., Inc. (“Schwab”). All rights reserved. Member SIPC. (0413-2767)
