What is Shorting A Stock
Short selling a stock works as follows. The shares you short are borrowed by you from your broker this is why short selling can only be done in a margin account. The moment you click short on your order entry and get filled you have borrowed those shares and basically sold them at that price point. At this point you have borrowed those shares and stated you sold them at a specific price point.
What Happens After You Short A Stock
Now that you have opened a short position you are going to manage it like any other position you have traded. Hopefully, you have gained some or preferably a lot of day trading education and have a pre-determined trading plan set in place to manage the short position you have opened.
Remember with a long position your absolute max risk is the amount of money you put into the trade if the stock goes to $0 but with shorting your risk is in theory infinite because the stock can keep going high and higher while you are still in that short causing you to go deep into the red.
So, if ever there was a time to have a trading plan it’s during a short position. The next step is closing that position and the way you close a short position is buying it back. It sounds confusing but it really is not. Depending on how your broker software looks to open the position you will click “short” or “sell” and to close the position you will click “cover” or “buy”.
When Should I Close My Position?
This depends entirely on your trade plan if the stock reaches your stop loss you would then click“cover” or “buy” to close out the position and protect yourself from further losses. If you have a trading plan you would also have profit targets and once the stock begins to reach those levels you would start to lock in some profits by clicking on “cover” or “buy” this will close out the positions.
What type Of Account Do I Need To Short Stocks?
You need to have a margin account in order to short stocks because you are borrowing the shares the moment you open a short position and since its technically a loan you can only accomplish that in a margin account.
Is There Any Other Way To Short Without A Margin Account?
The only other way to participate in a downward move via shorting a stock is using options contracts and you can buy these contracts in a cash or margin account. The option contract you would buy too short a stock is called a “put” contract. To short via “put options” you will need to buy the option (not sell or short) as the stock goes down the “put option” will grow in value.
Short selling stocks can be very lucrative and a well-rounded trader knows how to take advantage of trends both to the upside and downside on a stock. However short selling stocks come with greater risks and this is yet another reason why day trading education is of absolute importance when entering the day trading arena.