Short Selling - What is it and Why You Need it As a Trader

9 out of 10 trading strategies are exclusively designed for bull markets. The basic premise that you buy low and sell high is one that traders have been trading on since day one. However, every now and gain markets fall and usually when there's a crash only the strong will survive. The strong traders are usually the ones that can weather the storm by trading in any market condition.

In a bear market most trading strategies are ineffective simply because you cannot buy low and sell high. Dividends are usually bad and stock options incredibly risky. Short selling is one of the best strategies in a bear market and the basic premise is that you male money when the stock loses value.

In other words, instead of buying low and selling high you will sell high and buy low. Huh? Mind boggling isn't it, but bear with me as I explain.

With short selling you can "sell" stocks you don't own by trading on margin. Every broker has their own rules and short selling is heavily regulated but the principal is the same.

If you see a stock is about to start falling you can "short" (trading lingo for short selling) that stock at it's current price - effectively you are selling it. When you do that you, are responsible to return those stocks to your broker (sometimes there is a time limit - be careful as your broker can call on you to complete the trade) regardless of the price.

So, if the stock keeps falling you can buy it back t a much lower price, give the broker their stocks back and stick the profit in your pocket. Lets say you were short selling 100 stocks of XYZ Company at $5 a stocks. The next day the CEO of XYZ Company resigns and the stock starts falling rapidly. Two days later the stock is trading at $2 a stock.

At this point you decide to fulfill the order and buy the stocks back. Now you can buy it as $2 a stock and give your broker his stocks back. You just made $200 from a stock that was doing terribly.

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