The Basics of Short Selling a Stock by ScaredyCatGuide
Many people have heard the term "shorting a stock" but often do not know what it means. Let's cover the basics of this real so you can understand more than just the long (buy) side of the market.
This is a topic I discussed last year, but would like to share again.
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Short Selling Stock
When we short sell a stock, we are essentially borrowing it as you cannot sell something you do not have. Short selling a stock is betting that the stock will go down as opposed to up.
For example - if we want to short stock XYZ at $20, then we put in a sell order and have borrowed the stock upon execution of the order. If the stock sinks below $20 then we make money, if it rises above $20 then we lose money.
Buying Vs. Selling
When we buy stock, we have purchased something and the amount we purchased it for is the maximum that can be lost. A stock can go to zero, but no lower. The price you paid is what you risk.
When shorting a stock the risk scenario is reversed. The most we can make is the difference between the price we shorted it and zero.
Using our earlier example of XYZ at $20 - the most we can make is 20 points because a stock can only go to zero.
No Limit On Potential Loss
However, there is no cap on the amount of money you can lose when shorting a stock. This is why the strategy is considered risky and most brokerages only let account holders short stock buy meeting certain restrictions such as account minimums and having a margin account.
(Note: A margin account is when the brokerage allows you to leverage your account balance to trade on borrowed funds)
Conclusion
That really is all there is too it. There are two sides to a market. Being long or being short. Know you know how both work.
Best Regards,
So if I get it right: shorting is like making profit out of the value of a coin going down? So if I think that for example ethereum will go down, I borrow a ether token from someone on an exchange and I do sell it for it's current value, let us say 300 USD. Then I wait for the price to go down, and I buy it back for 200USD and I gave back the 1 ether to the person who I borrowed it from and so I made 100 USD? Am I right with this short example?
Yeah, that is the basics of it and short selling can certainly apply to crypto as well. I am yet to personally short any crypto coins (just doing equity markets now), but I know its available as an option I have seen others do it.
Thank you for sharing this information! It looks like a risky thing to do, for sure with cryptocurrency, you never know when a coin is skyrocketing to the moon, it could become an expensive thing to buy it back to give it back... But with high risks you can get high profits to, nothing comes from nothing (as we say it in Dutch!)... Good luck with your investments!