What Does Shorting a Stock Mean and How to Short Stocks?
What does shorting a stock mean in the stock market? Shorting stocks is the opposite of going long. This strategy allows you to make money as a stock falls. Look to sell a stock near resistance levels, which creates a negative position. Then you buy to cover at support levels, your position is closed, and you keep the difference. Example: If you sell at $2 and cover at $1.80, you make $0.20 on the trade. You need specific brokers that allow you shares to borrow to short and not all brokers have good short locates. Watch our video on how to short stocks.
What Does Shorting a Stock Mean?
Shorting a stock means that you are taking a bearish position on a stock. The way that you do this is by borrowing shares from your broker, which is an automated process. This creates a negative position in your account. So, you sell high by borrowing shares then you buy low to cover your position and then you’ll be back to even in your account.
So a lot of new traders ask the question what does shorting a stock mean. It’s something you want to learn and understand fairly early when you start out on your quest to learn trading. When you short sell a stock, you’re borrowing shares from your broker and selling them on the open market with the expectation the stock will go DOWN IN VALUE. Then you “cover” or buy back the shares and keep the price difference in profit!
Short selling is a very popular trading technique for experienced traders. Short sellers especially enjoy shorting junk stocks that have ran too far, too fast and are ready to crash back to reality. Penny stock are our favorite to short, because so many of them have weak fundamentals. But occasionally the blue chips and large caps are great shorts too. Take a look at $SPY today on December 30th 2019 for a good example of a short entry. The daily and weekly RSI were above 70 which is considered overbought.
There’s a right way and a wrong way on how to short a stock. One makes you money, one doesn’t. Shorting can be very risky, but very profitable if done right.
101: What Does Shorting a Stock Mean
What does short selling mean? This is a question every trader should be able to answer. Especially when trading penny stocks. It’s important to be able to make money in any market whether bullish or bearish. If you’re planning on being an active trader, short selling is a tool you’ll want in your bag. If you’re just a bull, you can sit around to wait for the trend to change, but where is the fun in that? If you’re trying to trade full time, you’re going to be sitting on your hands a lot waiting for bullish setups. Sometimes you just can’t find them or they just aren’t there. Hence the need for shorting!
Learning how to short gives you the skill to make money in a down trending stock or market. The market trades in cycles and prices go up and down like (like a roller coaster sometimes)
If you don’t have the skill to make money in a bear market, you’re leaving profit for someone who does know how to take advantage of the shorting opportunity.
Learn how to short stocks by taking the time to study and practice. The ability to trade any market is a skill every trader needs if they want to survive long term.
Why Short Sell?
So why short sell? You believe the stock you’re looking at is going to go down in price. You’re bearish on the stock! With this in mind, you go to your broker and ask to borrow shares at the current price. You just select the number of shares you want to sell, and click sell. Do a limit order, typically, not a market order. When you sell the shares SHORT – you see a – negative balance of shares in your ledger. You’re making money as long as the stock moves LOWER than your entry price.
You then buy the shares back at the lower price, return those shares to your broker (automatically) and pocket the difference. In other words, you’re selling shares you technically don’t own “short” then buying them back at a cheaper price (hopefully). Here’s an example of a short setup on $AAPS from December 2019. See the entries you would short and cover? This would be considered scalping as day trades.
The stock market is a battle between the bulls and the bears. Some days the buyers win and other days the sellers win. You also have some mornings where the bears win, but afternoons where the bulls take over. It can change so quickly…you HAVE to have a system in place to recognize the signals of when you should go short and when you should go long. If you don’t want to short, you can always sit out the days the sellers (bears) are in control.
What Is Shorting a Stock Example?
- Here’s an example of shorting a stock:
- $AAPL (Apple) is at $300 resistance level
- You take short position on Apple of $100 shares. 100 x $300 = – $30,000)
- Apple falls to $290 and then you cover your position
- Your Profit = $1,000 ($300-$290 = $10. $10 x 100 shares = $1,000)
The Scoop: What Does Short Selling Mean
Alright what do I mean by knowing who you are up against? Well, if you’re a bull on a stock, there are bears out there. Bears who are short. They’re short selling while you might be buying. That COULD be a problem for you if you’re a bull. Think about the struggle that you’re participating in. What is your enemy thinking at a certain support level or resistance level? Get in their heads, and you’ll become a better trader 🙂
In the grand scheme of things, no one way of making money in the market is better than the other. However, having the skills to trade multiple ways can give you more opportunities. There are some days the Japanese candlesticks patterns are ripping and other days it’s slow and boring. You take what the market gives, and you use whatever strategy works, or you sit it out until your setup shows up.
Then there are days the market is a bloodbath of red, you can still make a profit. If you have educated yourself.
Your Broker Is Important
Not every broker has the capability to short sell certain stocks. Hence the need for a good shorting broker; especially if this is your primary way of trading. You also need to be approved to short sell by your broker. This usually means answering a few questions before they approve you.
There are some brokers that will have shares to short of certain stocks but certain stocks that are less popular or have lower floats…you might find it difficult finding shares to borrow.. If you’re OK not having every stock available to you to short then your broker options are more diverse.
Read our Interactive Brokers review as they are a good shorting broker. Do your research and find the shorting broker that works best for your needs. CMEG is also good, and they have no PDT rule.
However, if you don’t want to get a new broker you can trade put options. Put options are a form of short selling and every broker as options trading capabilities. Also you can always take our free options courses when you’re ready!
Risk: What Does Shorting a Stock Mean?
There are a couple schools of thought when it comes to risk and whats involved with short selling. The ones who think it’s way too risky and don’t ever do it. The others are traders who prefer to trade by shorting only.
Sure short selling is risky but isn’t trading in general? What should happen on every trade, long or short, is applying risk management. When you apply proper risk management, you’re going to keep your losses small when a trade goes against you. Including shorting a stock.
In theory, short selling has unlimited risk potential. When you long a stock, you can only lose what you invested. A stock isn’t going to have a value below zero.
However, when shorting, you’re betting a stock is going to go down in price. Instead, it can reverse and go up; and go up forever. Hence the potential to lose more than you even have in your brokerage account. Be aware of this! Have an entry, and exit and a stop level on every single trade.
Implement a stop loss whether with your broker or mentally. If you’re not willing to lose more than lets say ten cents, set a 10 cent stop loss. Beware of low float stocks and the tendency to trigger stops before heading back down.
The risk management you employ should be what you’re comfortable with and one that you’ve practice. That way you know it’s a winning strategy. We teach about shorting in our trading rooms each day. Check out our trading service to learn more.
Bottom Line on Shorting AKA Short Selling
Lets recap what it means to short a stock. First It means you believe a stock is going to go down in price. Second, you borrow shares from your broker and third, after any amount of time, you buy back the shares at a lower price (hopefully you got a good entry on the short and made money).
It has its risks, like any type of trading. Hence the need to open a paper stock trading account and practice. Make many practice trades before going live, work out the kinks. Start out with small positions and then scale up. If you’re looking for stock alerts – we got you covered! We call out trades now via our private twitter, and explain the trades out so you can see inside our heads, and thus, become a better trader. What is important is if you’re looking to get into short selling, make sure you practice! Please like comment or share this article and let us know if we helped you learn how to short 🙂