The Basics of "Short-Selling" a Stock or Crypto

The term "short-selling" a stock or crypto gets thrown around in investing all the time, but many people don't know exactly what it means.

Let's cover it with an example:

Short Selling Stock

When we short sell a stock, we are essentially borrowing it as you cannot sell something you do not have. Short selling a stock is betting that the stock will go down as opposed to up.

For example - if we want to short stock XYZ at $20, then we put in a sell order and have borrowed the stock upon execution of the order. If the stock sinks below $20 then we make money, if it rises above $20 then we lose money.

Buying Vs. Selling

When we buy stock, we have purchased something and the amount we purchased it for is the maximum that can be lost. A stock can go to zero, but no lower. The price you paid is what you risk.

When shorting a stock the risk scenario is reversed. The most we can make is the difference between the price we shorted it and zero.

Using our earlier example of XYZ at $20 - the most we can make is 20 points because a stock can only go to zero.

No Limit On Potential Loss

However, there is no cap on the amount of money you can lose when shorting a stock. This is why the strategy is considered risky and most brokerages only let account holders short stock buy meeting certain restrictions such as account minimums and having a margin account.

(Note: A margin account is when the brokerage allows you to leverage your account balance to trade on borrowed funds)

Conclusion

That really is it. There are two sides to a market. Being long or being short. Now you know how both work.

Posted Using LeoFinance ^Beta