Over the last several entries in this blog, our topic of focus has been short selling. We’ve covered what short selling is, when it might be useful to you as an investor, how to conduct the transaction. We also discussed what risks are involved in the trade, and the lengths that some individuals go to in order to use short selling in a dastardly and destructive manner that goes a long way towards earning it a terrible reputation. In this entry, we’re going to do a brief review of what we’ve discussed in order to put a capstone on the short selling subject once and for all before we move on to a new topic next time.
Summing Up Short Selling
To reiterate, short selling is when one investor sells shares that he or she does not actually own, on the agreement that he or she will actually buy the shares at a later date. They make money on the transaction if the value of the stock falls in the interim, enabling them to buy it at a lower price than they sold it for. Of course, when the shorted share actually increases in value, the short seller loses money.
That means that short selling is a very high-risk transaction. On the one hand, the value of a stock can’t go below zero, so the amount that you stand to earn is limited, but there is no ceiling to how high the value of the stock can rise, so the amount you could lose on the transaction is theoretically limitless.
Many people consider short selling to be a dishonest or unethical approach to investing because of the necessity of “voting against the home team” that comes with it. Despite the criticisms, however, short selling is definitely here to stay, so it pays to know all that you can about it. In doing so, you can add it to your stable of strategies and use it in a responsible way that brings value to your portfolio.
Thank you for joining me for Short Selling you next time when we begin an all new discussion.
See you next week for part 1 of Investment Scams.
Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 – 2008
{ 2 comments… read them below or add one }
Hi Sean,
Thanks for the wrap-up on short selling. It makes a lot more sense to me now but I don’t think I like this strategy. I also think it’ll be a while before I could even use short selling as a strategy.
It’s definitely seems like it’s for experienced investors.
I don’t dabble in high risk ventures nor speculate.
I like the education I have had over the past 4 years and I aim to continue refining my trading plan and being more versatile in all types of market seasons.
This is a good series, catering for people who have not had prior knowledge of the way the stock market works.