Questions about shortselling. Can you help?

Question

I wanted to short sell a certain stock that I was positive was going to go down, yet I wasn't to because I wasnt sure of the process. A certain stock went from 7$ to 35$ in just 3-4 weeks, and I knew it was going down (went down to 25ish already this week).

How would I have done this? What trade actions would I have needed to do? Would I buy, say, 10 shares of this stock at a high price and SELL SHORT option when the stock goes down? I am using Schwab if it helps. Please help!

Answer 1

You asked about short-selling, but may not realize how risky this is.  Why don't you look into buying a "put" first?  This is an option to sell the stock at a certain price, and allows you to benefit if the stock price drops during a certain time period.  In this case, your loss is limited to what you pay for the put.

Answer 2

First, your account must be enabled for "margin trading", which means the broker has determined that they will allow you to get loans on the account for trading purposes.

If you can't buy "on the margin", then you can't short sell, either.

If you can, then you just place the order, but you'll need enough cash in the account to cover a margin call, if the stock goes up (you bet wrong)

The details:

When you place a short sell order, the broker loans you 10 shares of the stock.

You then sell it (minus commission)

Three months later, the broker makes you buy the stock at market price and give it back to them.

Answer 3

First off, you need a margin account, thus the ability to borrow and be extended credit.

A short sale is the borrowing of the stock from the broker and consequently selling it, then buying it back.  Buying it back at a lower cost will result in a profit.

In the meantime, you will be charged the margin rate (or interest) for the transaction.  Additionally, any dividends paid during this period will have to be paid back to the owner of the stock shares.

A key thing is, whether the shares are available to be borrowed.  Stocks that have a high percentage of existing shorts may or may not have shares available to short.

If shares are not available to short, then one can always buy puts (provided options are available for this stock), although that's somewhat more risky, plus you need to be approved by the broker to conduct such activity.  In your case, shorting would be more viable.

E.g. So you short sell 100 shares at 25.  You buy back the shares (buy to cover) at 20.  You have a profit of 25-20*100 or $500 less commissions on each leg (sell short and buy to cover) and any margin interest in the interim...

Answer 4

Selling short means you are selling the shares before you actually buy the shares.  For instance if you are selling short 10 shares of Starbucks stock.  First you sell 10 shares even though you do not own any Starbucks stock.  You now owe your firm / clearing house 10 shares of Starbucks stock which you hope to "buy" at a lower price in the future thus repaying your firm the 10 shares you owe.

Answer 5

First of all I'm not sure you actually understand  your investments/options. I suggest you talk to your broker and let him explain some things to you or if you prefer to do the research yourself