What Is Shorting the Market?
- You see a stock at a price that you believe is overvalued and will not only drop but drop very soon. Even though you don't technically own any shares, you sell a number of shares by borrowing them from the company or another shareholder on the promise that you will give them back later.
- At a later date, once the stock's value has dropped, you buy the same number of shares in that stock that you "sold" earlier and collect the profits, then give the shares back to the person you borrowed them from.
- Shorting the market has a greater risk than standard buying and selling of stocks. If the stock continues to go up after you "sold" your shares, you must eventually buy it back at the higher price and take the personal losses. This means you can lose much more money than just what you'd have paid had you bought the stock outright.
- Most investors must open a margin account with a brokerage firm in order to short sell stocks. These accounts charge interest and may have other regulations regarding the short selling of stocks. These rules can hamper one's ability to make a profit, especially if they wait a long time in between selling and buying.
- Shorting the market can take place in both the stock market and the commodities market, where one can invest in, for example, an agricultural product by selling it and then buying it back when the product becomes less valuable. The major difference is that commodities increase in value when the markets are down--the opposite of the stock market.
