How to Sell Short

You might want to think of selling short as the flip side of the traditional stock market strategy. Rather than hoping a stock does well, you're betting on it to do poorly. If it seems risky, you're right--you're essentially swimming against the tide. There's money to be made, but it's critical to know the ins and outs of this aggressive system.

Instructions

Difficulty: Moderately challenging

Things You’ll Need:

• Margin accounts

1. Set up a margin account at a brokerage house. You need to put up collateral, such as cash or stocks, and the brokerage house will lend you up to 50 percent of their value.
2. Use the margin account to borrow shares of stocks from other accounts with your broker's help. You then sell them. If the price of the shares goes down, you buy the shares again at the lower price, return them to the accounts you borrowed from, and keep the difference. That's the practical definition of "shorting a stock."
3. Know the sorts of conditions that work. Selling short can be an effective strategy if the market as a whole is dropping. It can also be useful with a stock whose company has been hit by bad news or other developments that cause the stock to decrease in value.
4. Try short-selling on a very limited basis. You'll get a feel for how it works--and how it can hurt.

What to Look For:

• Margin account
• Market downturns
• At-risk stocks

Tips & Warnings

• Selling short can leave you having to pay a huge tab if things go against you. For example, if you short a stock at $5 a share and instead it goes up to $15, you're on the hook for $10 for every share you shorted.