How to Sell a Stock Short

Traditionally when you purchase stocks in the stock market, you hope the stocks will go up in price so you can sell and make a profit. When you sell stocks short, you hope the price of the stocks will fall so you can buy them back at a lower price. To sell stocks short you borrow the stocks from the owner at a higher price, sell the stocks and wait for the price to fall. You then buy the stocks back, return them to the owner and pocket the difference as your profit. Here is how to sell stocks short.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Computer
• Internet access
• Stock trading account

1. Log on to the internet and research stockbrokers. Consider their fees, trading commissions, time of trade executions and customer support. Go to your bank and ask about their stock brokerage services. Narrow your choices to a few stockbrokers.

2. Open and fund a stock trading account with the stockbroker or bank of your choice. Most stockbrokers and banks accept funding through wire transfers, money orders, bank-to-bank deposits and personal checks.

3. Research the stock market and understand what the stock market is doing. Note whether the trend is upwards, sideways or downwards. Read financial newspapers and magazines to determine the state of the economy.

4. Research various industries in the stock market. Note the sectors moving up and those heading downwards. Understand why. Select the laggards in the worst industries and look at their fundamentals. Check their profit and loss for the last five years, their return on investment (ROI), management styles, other stocks in that sector or group and the economic situations causing them to move downwards.

5. Log on to your trading platform with your stockbroker and sell the stocks short. Be sure to select Short Sales instead of Buy when you enter your order. Your stockbroker will borrow the stocks on your behalf, sell them and deposit the proceeds in your trading account. When the stocks fall in price, log on to your trading account and tell your stockbroker to buy the stocks back to cover your short sale. Your profit is the difference between what you sold them for and how much it cost you to buy them back plus brokerage commission and fees.

Tips & Warnings

• Shorting stocks or selling stocks short is tricky. It is easy to lose money in the stock market selling stocks short because the market can turn suddenly and head upwards when you expect it to go down.
• Do thorough research before shorting stocks in the market. Know the company’s fundamentals, the industry it belongs to and the prevailing economic conditions that may affect the stock’s performance.
• When you enter information in your trading platform, be sure to indicate that you are selling the stocks short instead of buying them and when you buy them back, tell your broker you are buying to cover an earlier short sale. It is easy to make mistakes during the process.

Resources

• What is short selling
• The basics of shorting stocks
• Short selling strategies