What it means to "Short" a Stock (or Crypto)

in steemleo •  8 months ago 

The term "short-selling a stock gets thrown around in trading and market talk all the time, but many people don't know exactly how to go about doing it.

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Let's run through the basic idea and 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 all there is too it. There are two sides to a market. Being long or being short. Know you know how both work.

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