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Exactly what is a Short Sale? ~ Reader question Sunshine Rae, Saxony, UK

"What is a Short Sale?

Glad you asked Sunshine, it is rather a simple concept if you realize investing in a stock so that it goes up in value over time is one way to make money in the market this actually what is know as being "Long" a stock.  Is not the only way you can make money.  You can also make money by being "Short" a stock.

So say you believe a stock is trading way, way to high and the economic outlook does not look good.  You "Short" sell the Stock a $150 a share (of 100 shares) so in a week the price of that stock has fallen to $100 a share, you then go into the market buy 100 shares to cover the "Shot Sale" and collect the price difference in the profit between he2 of $50 a share.

Investors look at ow many short sides a company has on it's books, companies trading high in short sales would be Sears, J.C. Penny's and other retailers.  f the company actually goes completely bankrupt you can still buy the shares pennies on the dollar and sell forte price you sold short.

Regulations have been put into place since 2008 on naked shorts, due to the amount of outstanding shorts placed on Lehman Brothers, many believe this actually caused the company to fail.  Starting the whole financial collapse of 2008.

here is inherent risk to selling short.  The stock can rise and never go back down to the price you short sold at.  Take our example above, you sold short 100 shares at $150 the next morning due to brilliant news the company opens for trading at $250 and i at $300 by the end of the day, to over your trade you must buy 100 shares at $300 to cover your short and suffered a lose of $150 a share.

Short selling is not something I would say stay away from, however understand it is not for the novice investor.  It is a legal way profit to profit of the ups and downs of the market.

  


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