What is Shorting or Going Short?

What is shorting or going short? Despite what it sounds like, it has nothing to do with time.  Instead, it refers to a way to make money when things go down in price.  When prices go down, you can make money because you buy low and sell high, especially in the stock market.

To short a stock you are betting that the value of a stock will go down. Shorting stocks is the act of selling something that you do not own. In order to do this you have to borrow the shares of stock from your broker.

How important is shorting stocks?

It is very important that a swing trader learn to short stocks. Buying stocks is only half of the equation! If the market in general is in a downtrend, you are not going to want to be buying stocks. So in order to make any money you need to learn how to properly short stocks.

Learning to short stocks will also help you to better understand where reversals will take place. By shorting stocks yourself, you will be able to gauge where other traders are going to short stocks and cover their positions.

This can be a sure way to make money, regardless of whether we are in a bull market or a bear market!

What is “shorting stocks”?

When you short a stock, you will borrow the shares from your broker, wait until the price drops, buy the shares, then return the borrowed shares back and you will profit the difference. Here is an example:

XYZ is trading at $30.00 a share. You think that the price is going to go down so you short 200 shares ($6000.00). You are borrowing shares of XYZ from your broker at this high price of $30.00. Just as you expected, XYZ goes down to $20.00 a share.

You decide that you are ready to cash in, so you buy the shares at $20.00. Your broker will now return the borrowed shares to the owner and you will profit the difference. Since you shorted at $30.00 and covered at $20.00 your profit is $10.00 a share on 200 shares – a profit of $2000.00.

What’s a short squeeze?

This happens with a stock that has heavy short interest. Let’s say that a lot of traders are short a particular stock. If the stock begins to rise rapidly, then short sellers will get nervous and want to buy, or cover. This could add significant buying pressure to the stock and make the stock explode!

In the next blog, we will cover what it means to go long in the stock market.