Just about everyone knows the concept of buying a stock or "getting long" a stock as there is a reason "buy and hold" is the most popular investing term.

However, there is the opposite side when someone short sells a stock. Let's discuss the key items to know about getting short a stock and what it entails.

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 since 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 the 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 stock a price and zero.

Using our earlier example of XYZ at $20 then the most we can make is 20 points because I stock can only go to zero. However, are risk is unlimited to because a stock can go as high as it wants.

No Limit On Potential Loss

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 buying meeting certain restrictions such as account minimums and having a margin account.

Conclusion

There you have it - the basics of what short selling stock is.

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Regards,

Thanks for the pic pixabay