Chapter 14: Selling Short, as known as Shorting Stocks

Selling Short

Okay, Fun Seekers, have we got a strategy for you! You say you believe a stock (or any security, for that matter) is overvalued and the price is bound to fall? Well, you can sell that stock short (aka short the stock) and if the price goes down, you will make money. Of course, if the price goes up, you will lose money. In fact, if the price goes up, you can lose a whole lot o' money very quickly. Check out the article below after you have learned how to short stocks. (Don't actually short stocks, though, okay? I mean, we don't want you to wind up like the poor slob in the article below. It is more dangerous than buying on margin. And you know how I feel about buying on margin, right?)

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Help! My short position got crushed and now I owe E-Trade $106,445.56! Links to an external site.   Peter Lynch says, "Never short a stock." This unfortunate guy had to learn the hard way.

As with the calculations regarding options and buying on margin, the calculations regarding selling short are not easy. Let's take a look at examples of the types of problems you will see on the Series 7 General Securities Representative Qualification Examination (aka the Registered Representative Exam or simply the  Stockbroker Exam). Again, these calculations will *not* be on the final exam.