How to Buy Stocks Short
Buying stocks short is also termed "short selling" or "shorting" and simplified, it means betting on a security such as a company's stock value to decline. To do this, the short seller must borrow the security from their broker on margin and then sell it. The investor later buys it back (hopefully at a lower price) and collects the difference. The opposite of the traditional investing strategy; buying stocks "short" means selling high and buying low. This is why short sellers are viewed as "bearish." This article will tell you how to buy a stock short.
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Instructions
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How to Buy Stocks Short
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Like all investing, the first step in buying short is doing proper research. There are many reasons why a stock's value may decline -poor earnings, weak overall economy, bad management, over-valuation, regulation. You must weigh the company as you would if you were making a traditional "long" investment but in reverse.
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The actual process of buying a stock short requires a margin brokerage account. A margin account allows you to borrow from your brokerage to make a trade. When you buy short, you borrow the value of the stock from your brokerage. At the time you sell the stock (close the position), you are obligated to repay your brokerage, usually with interest.
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As an example, we will try to buy short a DOW 30 stock, General Motors, short. Call your broker if you do not have an online account and they will help you. If using an online brokerage account, login and click trade. If you do not, have a margin account, you will have to sign-up. This can usually be done under "account features."
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Once your margin account is established, click trade and choose sell short and enter General Motor's ticker symbol "GM." Choose X amount of shares and click submit. When the stock price declines (hopefully) to the desired value, you must "close" your short sale by reversing the trade with a "buy to cover" order.
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Buying short or short selling is made more complicated by the margin trading involved. Read your brokerage's margin account agreement carefully and know the fees and interest you will be charged when attempting to buy stock short. Good luck!
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Tips & Warnings
Buying short is inherently more risky than traditional investments because you have unlimited downside (a stock price could theoretically continue up forever) so research thoroughly.
