Last time, we talked about how short selling is a valuable trading technique that can go a long way towards ensuring your long term profitability as a trader. The ability to profit during a bear market is one of the hallmarks of a seasoned trader, and something that can really make the difference between an amateur and someone who knows what they’re doing.
Short Selling Transaction
Let’s take a look at how a short selling transaction might play out, so that we can better understand the situation for ourselves. In doing so, we can come to realize just when employing a short sell transaction might be useful to us, and when it might become a disaster.
Presume that you take a look at the market and come to the conclusion that a certain stock is about to plummet. You can see it on the horizon, but you haven’t heard the rumbling elsewhere yet. It’s something that’s not anticipated, just a hunch that you have.
Let’s say that stock in that company is currently selling at $100. You decide you’re going to capitalize on their failure and short sell a bundle of shares valued at $1000.
Two Possible Outcomes
Flash forward a few months and we can see two possible outcomes. In the first, your predictions proved to be correct, and the value of the stock dropped from $100 to $50. Now, you’re forced to buy back the stock in question that you short sold, but in so doing, you’re only spending $500. That’s $500 profit on your initial investment!
But suppose the opposite had happened? If the value of the stock had instead surprised you and risen to $150, then you’re be forced to pay back $1500, losing a total of $500 on the trade.
Clearly, short selling is something that we have to carefully study if we’re going to be able to do it wisely and profitably. Next time, we’ll take a more in depth look at some of the risks involved in short selling.
See you next week for part 4 of Short Selling.
Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 – 2008
{ 3 comments… read them below or add one }
Hi Sean,
I understand what you mean by short selling; I think. This is a good way to make some money if you’re right about the price of the stock falling and staying down until you have to buy it back again.
I think you’d really have to know what you’re doing to make this one work.
I like the thought of trading with a successful trading mentor who can teach you visually how to implement techniques to take advantage of a Bear market.
Going short is just the opposite of going long, so you just need to reverse your thinking.
Working alonside a successful trader whi can teach you visually is the only way I could master some of these tactics in this blog! The maths are beyond me to work at alone!