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Some Things To Know Before Short Selling Stocks
By John | July 29, 2010
Shorting stocks is a creative strategy.This involves selling a stock right now and then going out and buying it back at a later date, hopefully for a cheaper price.In other words it works in a completely different way then traditional investing.
This is a fantastic way to make money when the market is down.However before you start shorting stocks there are some things to consider.
1. It is a Quick World
Stocks go down fast.When you buy a stock you can hold onto it for a long time period and benefit as it slowly increases in value, short positions on the other hand might make the majority of their profits in just a couple days.
Another thing to consider here is that stocks are basically a long term bullish investment. So, if you are playing against them you had better be quick about it.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 many stock tips out there about limiting your losses when it comes to short selling stocks you really need to pay attention to this.There isn’t a limit to the amount of money that you can lose when you short a stock because there isn’t a limit to how high or how fast a stock can appreciate in price.
So, if you let a short position stay it can lead to large losses. This is why you need to keep them small with things like stop losses that will get you out if you lose a certain amount of money before those losses become larger.
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.
Topics: Stocks |
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