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24.08.2014 admin
Short selling is the sale of a security that is not owned by the seller, or that the seller has borrowed. A week later, SS reports dismal financial results for the quarter, and the stock falls to $45. Suppose the trader did not close out the short position at $45 but decided to leave it open to capitalize on a further price decline. Two metrics used to track how heavily a stock has been sold short are short interest and short interest ratio (SIR). While short selling is frequently vilified and short sellers viewed as ruthless operators out to destroy companies, the reality is that short selling provides liquidity to the markets and prevents stocks from being bid up to ridiculously high levels on hype and over-optimism.
Deepen your knowledge of short selling by reading the basic guide on Short Selling: Introduction.
There are two ways to make money on the expected reduction in the price of a security (a stock). I’m an investor that has just seen the price of his stock in Google go from $400 to $500.
Short sellers are frowned upon the same way we look down on a casket retailer that price gouges. The SEC temporarily banned shorting of various financial institutions because they prices of the companies had already suffered so much. Investors are always on the lookout for quality companies, but it can also pay to buy troubled stocks.


Amazon (NASDAQ:AMZN) stock has declined by nearly 20% year to date as investors seem to be disappointed with the company's lack of profitability. This has produced amazing results for investors in Amazon stock over the long term, as the company has generated spectacular growth rates in key variables such as sales and operating cash flows. Understandably, growing losses are generating anxiety among investors in Amazon stock, and many of them seem to have thrown in the towel lately, at least judging by the market performance of Amazon stock over the past months. We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions. So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.
This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift. Short selling is motivated by the belief that a security's price will decline, enabling it to be bought back at a lower price to make a profit. A trader believes that stock SS which is trading at $50 will decline in price, and therefore borrows 100 shares and sells them.
The trader decides to close the short position, and buys 100 shares of SS at $45 on the open market to replace the borrowed shares.
Although abusive short-selling practices such as bear raids and rumor-mongering to drive a stock lower are illegal, short selling when done properly can be a good tool for portfolio risk management.


You might be able to make a pretty penny by carefully reviewing the financial condition of heavily shorted stocks, and then buying a long position to take advantage of a potential short squeeze.
However, for those who prefer innovative growth companies with a long-term strategic vision and spectacular competitive strength, the recent dip in Amazon stock could provide a buying opportunity. Short selling may be prompted by speculation, or by the desire to hedge the downside risk of a long position in the same security or a related one.
If the trader decides to close the short position at $65, the loss on the short sale would amount to $15 per share or $1,500, since the shares were bought back at a significantly higher price.
Apart from this risk of runaway losses, the short seller is also on the hook for dividends that may be paid by the shorted stock. Since the risk of loss on a short sale is theoretically infinite, short selling should only be used by experienced traders who are familiar with its risks. The short sale was only made possible by borrowing the shares, which the owner may demand back at some point.



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