Shorting stocks is a creative strategy. It involves selling a stock today and then buying it back later on. In other words it is the opposite of traditional investing and works in a completely different way.
That is a fantastic way to make some extra money when stocks are down. But, before you start it there are a few things that you should know.
1. It is definately a fast kind of world
Stocks Fall Fast. Whereas you can buy a stock and hold onto it for years profiting slowly the entire time you might short a stock and make the majority of your profits in just a few days.
Another thing to consider here is that stocks are basically a long term bullish investment.So, if you are going against the long term trend you had better be in and out quickly.In general holding onto a short position for an extended amount of time is a bad idea, now there are some exceptions to this, but most stocks go up in the long term.
2. You Need to Limit Your losses
While there are plenty of stock market tips out there about limiting your losses when it comes to shorting stocks you need to pay more attension to this. There is no limit to the amount of money that you can lose when you short a stock because there is no limit to how high it can go up.
So, if you let a short position stay it can lead to large losses.This is why you really need to keep your losses small by using things like stop losses which will get you out if you lose a small amount of money before those losses become too big to handle.
3. You Have to Pay Dividends
Dividend paying stocks really work against short sellers.That is because when you short a stock and they make a dividend payment you will have to pay that dividend.
Thus it can be a smart idea to avoid shorting stocks that have a high dividend or to take the dividends into consideration.
