What Does Selling Short Mean?
When investment professionals are talking, you may hear the phrase “selling short” and not know what it means. In the simplest of terms, it means selling stock that you do not own in anticipation of buying it back at a lower price and making a profit. We’re going to explain it further for you here.
Most of the time, investors take what’s called a “long position” when they buy stock. That is they buy stock hoping that the stock will go up and become more valuable. Then if you keep the stock your portfolio becomes more valuable. If you sell the stock, the difference between the higher price you sold it at and the lower price you bought it at is your profit.
People sell stock short when they think the price will go down. Then when you buy the stock back at a lower price, the difference between the price you sold it at and the price you paid to buy it back is the profit. However, there is a much more risk in selling short, and that’s why amateurs should not do it. Here’s why:
Let’s use an example. Say you buy stock at $10 per share. Let’s say you buy 100 shares, so that’s an investment of $1000. The stock can go up an unlimited amount, and your profit has no ceiling. The most you can lose is if the price of the stock goes down to $0, and you lose your initial investment of $1000.
However, let’s say you sell stock short at $10, expecting the stock to go down. If the stock goes up instead, then every penny above $10 is a loss, and there is no limit to how much loss you can have. The most profit you can make is if the stock goes down to $0.01. This is why selling short is fraught with risk, and it is best left to professionals.
Noah Belcher is an Investment Advisor with Industrial Alliance Securities Inc., and is a CERTIFIED FINANCIAL PLANNER® professional and a Chartered Investment Manager (CIM®), who help his clients achieve their financial goals and objectives. He offers personalized solutions and stellar customer service to clients with complex tax profiles who require top-notch advice.
If you have any questions about this article or would like to talk to him about your financial profile, call his office at (604) 535-3454.
This information has been prepared by Noah Belcher who is an Investment Advisor with Industrial Alliance Securities Inc. Opinions expressed in this article are those of the Investment Advisor only and do not necessarily reflect those of Industrial Alliance Securities Inc. The information contained herein may not apply to all types of investors. Industrial Alliance Securities Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.
