Developing a Strategy

There are numerous strategies that incorporate short selling stock. The simplest strategy is the previously described plain vanilla short sale. Perform a detailed analysis before leaping in, because if the shares rise after you’ve sold them, you can potentially record substantial losses. A company’s stock price can decline for many reasons. If the overall market declines, most companies’ stock prices decline also. Quarterly and annual earnings releases are a good time to plan your short sale. If you expect a company’s earnings to be lower than the market consensus, shorting the stock may be appropriate.

Execute the Transaction

Monitor the Transaction

Timing is very important, because you need to close out of the short sale while it is showing a paper gain. If you borrowed 100 shares and sold them at a price of $10 per share, the initial proceeds are $1,000. If the shares decline to a value of $5 per share, you can purchase the 100 shares for $500 and return them to the lender. This would earn you a net profit of $500, not including broker’s fees. Set your parameters at the onset of the trade. This will be based on your risk tolerance and expectations for the range of the stock price’s movements.

Protect with Borrow

References

Resources

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