If an investor sells a stock that they do not own and then buys it back later for a different price, this financial strategy is known as shorting stock or short stock. Since the stock market runs on a boom and bust cycle, most traders and investors will purchase short stocks as a means of making money when the stock prices decreases in value.

Shorting Stock: How Does It Work?

Most average investors are able to short stock, however, it is important to note that an individual has to use a margin account if they plan on shorting a stock. This will allow you to borrow money if you purchase stocks. A common complaint surrounding shorting stock is that when you short a stock, unlike when you buy a stock, you are at risk of losing money if the price goes up in value.

For instance, if an individual decides to short a stock and sell 100 shares for $10 and then the stock value decreases to zero, that individual has made $1,000. However, if that same individual decides to buy 100 shares of stock and the stock price decreases to zero, they would lose money. Keep in mind that you are going to want the stock price to decrease in value when shorting a stock.

What Are The Benefits of Shorting Stock?

Those with a strong sense of intuition and the ability to manage their own portfolio of stocks will benefit the most from shorting a stock. Additionally, short a stock if you have been following the track record of a single stock and you are aware of when things are not doing well. Overall, shorting a stock is always a viable option if a drop in price has been predicted.

Though there are numerous benefits of shorting a stock, keep in mind that it’s possible that the stock price that you expect to go down will suddenly increase in value, so it’s important to keep an eye on the market at all times.

Photo: Depositphotos/© Tzido