How to Short Sell on the Stock Market
Stock traders are always on the alert for profit opportunities no matter what the market is doing. Selling a stock short is a way to turn a profit when shares of a company's stock drop in value. The idea is simple. When you short sell on the stock market, you agree to sell the stock (usually to your broker) for the current market price---but at a future time, even though you don't own the shares. If the stock in question falls in price, you buy it at the new lower price, sell it at the old price and pocket the difference.
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Instructions
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Open a margin account with your broker. SEC rules require you to have the shares available to short sell on the stock market, so you must borrow them from your broker. To do this, you must have an account borrowing privileges (which is what a margin account is). The broker checks your credit, asks for information on your income and assets and has you sign an agreement that funds in your account may be used as collateral for money or stock you borrow. Margin accounts require larger initial deposits and minimum balances.
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Watch the market for stocks that may be overvalued and ready to decline in price. Brokers will not allow a short sale if a stack has already started to decline. To short sell on the stock market successfully you must learn to spot warning signs that a stock is overvalued early.
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Check to see if your broker has shares of the stock you want to short sell on hand. A broker can only loan you stock he owns, so in some cases you won't be able to complete a short sale. When you do borrow stock for a short sale, your broker remains the owner and gets any dividends that might be paid. Also, since the stock isn't yours, any profits won't qualify for capital gains tax rates.
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Borrow the stock from your broker when you spot a good opportunity and short sell the stock on the market. You will be charged interest on the loan, although the rate is usually low.
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Monitor the stock price carefully. If you short sell on the stock market, and the stock goes up in price instead of down, you stand to lose money. Also, you must maintain a minimum equity in your margin account. If the potential loss from a stock you've sold short reaches the limits imposed by the SEC or stock exchange, your broker will have to issue a margin call. You then must deposit more funds in your account or the broker has to close out the transaction and you take a loss.
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