Shorting Stocks Part One

Okay, let’s talk a little bit about shorting stocks. Shorting stocks is really no different than buying stocks except that you are selling it first and you are buying it second. Normally you might buy first and sell it later, but with shorting stocks what you do is you sell it first and buy it later. So, obviously you are trying to sell it at a higher point than you buy it back.

The main difference with shorting stocks is that you need to be able to borrow the stock from your broker in order to short it and that you will pay a small fee to be shorting it or to be borrowing it from your broker. So, let’s say, for instance, let’s use the S&P 500 SPY. Let’s say you think that the general market is heading down. Maybe there is an interest rate hike or some bad news or something…and you think the market is heading down. So what you can do is sell the S&P 500, SPY, and then buy it back later. You can buy it back a minute later. You can buy it back an hour later. You can buy it back at the end of the day. You can buy it back in many days.

The S&P 500, the SPY, is pretty easy to short. There is almost never a problem getting borrows on that. When you run into problems getting stock to short is when the float is not that high. So, in other words, if you have low float stocks and everyone is kind of gambling on them and they want to short during the day, your broker may or may not be able to locate those borrows. Then if they can locate them, they may be charging kind of a high fee to lend them to you to short.

We can get into that in more detail in other segments but the bottom line is that if you want to be a good trader, you might as well get used to the idea that you’ll be shorting a lot of stocks and it’s really very similar to going long. It’s just doing it in a different order. Okay, that’s it for now.