Even if you don’t own a share, you can still sell it. This is what short selling is all about. The stock broker buys the stock and lends it to the loanee. The loanee sells it at a higher price with a promise that he’ll buy it in the future and return it to the broker. When the stock price lowers down, the loanee rebuys the stock and returns it to the broker. The difference between the selling price and the buy price is the profit that short-sellers make for themselves. Short selling has become a new way of making profits, although not as popular as long selling. Here are some of the pros and cons of this game
Short selling is not yet trending but is going to go great miles due to the advantages it provides that include:
The most apparent advantage of short selling is profits. When carefully strategized, short selling can be great for your pockets. With short selling, you’re not only making money when the stock price goes up but also when it goes down.
With short selling, you don’t have to empty your pockets as in long selling. Instead of buying the stock, you’re borrowing it with the intention of returning it. Once sold, you are keeping the profits and buying the same stock without spending your own money. Sometimes the broker asks for a fee when you borrow the stock. It can be refundable as well as non-refundable. It still does not beat the profit you’re making from short selling.
Hedging minimizes the risk involved in stock trading. This is the strategy used by long sellers. They buy the stocks for long selling and at the same time borrow some for short selling. When the stock prices go up, they sell their stock and also the ones that were borrowed. When the stock price lowers, they can rebuy the stock. If the price lowers first, they are losing it in short selling but are winning in long selling since they can buy more at a lower price. Short selling avoids risking a lot of money.
With obvious advantages, there are some disadvantages associated with short selling. These disadvantages are the reason not that many people go for this strategy.
If a stock price skyrockets, there’s no limit to the loss you’ll have to endure. With time getting out of your hands, you’ll be forced to buy the stocks at this high price. Waiting can sometimes be lethal for your trade.
Stockbrokers charge a commission for every stock you buy or sell. There are some margin interest rates by some stock brokers as well. Even if you have to break even in these conditions, you have to make 10% more than the stock price. You better be sure before you start short selling.
Borrowing a stock is not that easy. There’s a hard-to-borrow or stock-loan fee which behaves like interest. They range from 100% to 300%. We again suggest thinking long and hard before you start short selling.