19 Replies to “The Ultimate Short Selling Guide”

  1. Great detailed explanation of exactly what is involved in short selling. This has helped me to weigh up the pros and cons and, whilst I don’t think I will be adding short-selling to my investment strategy at the moment, I would not rule it out in the future now that I know more about it.

  2. Hi Louis – I found your article very interesting.  I have heard of the term short selling before, but now realize I didn’t completely understand what it meant or how it works.  You provided a lot of great information here for anyone to understand it and make a decision if they want to persue it.

    I can see how this type of trading can help diversify your overall investment strategy.  Thank you for this information.

    Michele

    1. You are very welcome Michele. I am happy to hear that you learned something from this short selling guide. 

  3. Thank you for sharing this information , very informative . I have to say that firstly I am a novice trader and have just strated looking into trading options such as short selling . Honestly I struggle to fully grasp the concept of Short Selling and have signed up for your email course” Learn to Trade Options for Consistent Income” .I have received my first  lesson and looking forward to the following course information , awesome trading video resources. !!! Cheers 

  4. Hi Louis,

    Thanks for sharing helpful tips and information about Short Selling. Basically I am not a expert trader and still learning it. I found your website is very important for me. So I have bookmarked it in my favorite section. I understood the basics of short selling. I am still searching a consistent profit trading strategy. Can you give me a suggestion for that? I am looking forward for your other article. 

  5. Hi Louis, 

    When it comes to trading I am a scaredy cat. I do not handle risk very good. I have a question though, what is the usual period of shorting? A week? I have an account with E*trade, I am just gonna have to gather up my courage and be more adventurous with trading. Thank you for expanding my options.

    Take care

    1. Hi,

      First of all, I just want to say that it is completely natural to be risk-averse. No one likes to risk their hard earned money. Nevertheless, I don’t necessarily recommend just being ‘adventurous’ with your real money. Instead, I recommend educating yourself first. If you educate yourself and actually know what you are doing, you will also have a much easier time risking money. 

      Another tip would be to trade very small so that you only are risking tiny amounts.

      A typical time frame to hold a short position can vary widely from trader to trader. It can as short as a few minutes and as long as multiple years. My estimate of the most usual time-frame would likely be a few weeks. But like I said, this can fluctuate a lot depending on who you ask.

  6. Great post and good info.

    I did this a couple of years ago, but the market was more volatile than it is now, which means that you could have better profits, but also more loss. In the end, I had a break even, and with the short selling I could have made more money than I did, but it is all about experience and having a good guide. 

    I will share this short selling guide because in my opinion this is one of the best I could find. 

    Thanks a lot! 

    1. Awesome! I am glad to see that you liked it. Furthermore, I have to agree with you that experience plays a key role in trading success.

  7. Hi! I was recently introduced to short selling. I was surprised on how dangerous some people say it is. But I hadn’t read the details to this strategy until I landed on your site. And I’m glad I found your post, because you explain it in a way that it is very easy to follow.After reading the risks involved, I believe they are manageable. I have realized that the infinite risk is just in paper, because stocks don’t go up and up forever. And I’ll always pay attention to my risks of buy-ins. Thank you very much for this very informative post!|

  8. This was a great post to read and I really enjoyed it. I think that I heard of short selling before but I find really fully understand what it was until I read your article. I would like to ask if you should short trade when you are more advanced in trading or when you are a near beginner?

    1. If you are just starting out, your main focus should be on educating yourself instead of on actual trading. 

      Due to the risk involves in short selling, I only recommend shorting if you really know what you are doing and have a solid risk management process in place. But this is the same for all kinds of trading.

  9. Thank you for this article about short selling something of which that I knew nothing about so this was very interesting. I have started to explore the world of shares so this was a good eye opener although I think I will wait a while before even contemplating something such as this. For those stock wizards out there i’d imagine they have found this so useful with your detail. Thank you

  10. Hi, this was a great read to help understand Short Selling! My only unclear portion is the understanding of in your example of only losing -$1000 if your short rose $10. Wouldn’t you need to pay your broker back the initial cost of the stock plus(+) the $1000 lose? So in essence you would have to pay your broker back a total of $11,000 or ($6,000 on a 50% margin since you already put $5,000 down up front)? That would be a significant lose and risk.

    1. Hi Heath,
      Thanks for the comment. The capital required to open a position is not factored into the P&L calculation. For the sake of an example, let’s assume there aren’t any margin requirements for shorting a stock. If you then short a stock for $10’000 you just sell it. So theoretically, you receive $10’000 from the buyer of that stock which means that your account balance goes up (in reality, you usually can’t use this money though and your buying power goes down). So when you close the position for the same price by buying it back, you have to pay $10’000 which decreases your account balance again. This, however, has no effect on your P&L. Your P&L is only affected by the difference in opening and closing price. The transfer of money or shares between you and your broker is handled automatically and you don’t have to worry about it.
      It’s basically just a mirror image of what you do when buying a stock normally. If you buy a stock for $10’000, your P&L isn’t -$10’000. It stays neutral as long as the stock doesn’t move.
      But note that you are absolutely correct in saying that short selling involves significant risks. If the price rises far enough, you could lose your entire investment and, unlike with buying stocks, you could even lose more than your initial investment.
      I hope this clarifies it. Otherwise, certainly, let me know.

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