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Bryan D | Question about shorting stocks? |
Let's say you have 300k in your account, and you decide to short 50k of a stock, with the other 250k remaining cash in your account. My question is: Is there a time limit that you will have to cover (buy the stock back)? Based on what I understand, if the price of the stock goes up after you short it, they will transfer the difference from your account to the account of the stock owner, and you can basically wait as long as you want (since you have more than enough funs in your account) until the stock price falls back down. Is this true?
Thanks |
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brad
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I have shorted a few in my day and lost a lot of money. Sad thing is, when i am dead right and short a few name stocks, I always seem to cover for a short gain and miss on all the downside I had envisioned while going short in the first place.
I would highly suggest not shorting 50k all at once. i have often shorted all at once on margin and held for a few days. I should have added to my short when the pps went up a bit in the following days.
The time limit depedns on how good your brokerage is and how liquid the stock is for them to find in their system to short. All the daily volume leaders should be easy to find for any reputable online brokerage. They don't give the actual owner the difference if the price goes up. You are mistaken on that part. Also, be careful of some of the newer legislation against shorting and the funds.
You can't wait forever, it depends on the brokerage and the owners of the stock long. Big brokerages can look to find more long owners of stock if they want to. otherwise, you will get called and have to cash in, this can also be positive for you. if you are sitting on a gain. With the dow's big dump last week and the bad current conditions, i would shy away from shorting right now. you may have missed your chance or you may have just the right time? Who knows.
More likely than not, if the price rises, there would generally be more sellers and less shorts out there, so that would be a given chance when you would be more likely to get called and have to cover for a loss, in my opinion. |
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Paul E
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the fact is that there is no time limit to shorting of stock. The only limit is your balance, if you lose you funds and the stock continues up, you must either cover the continuing difference or they Automatically close the position for you.
The owner of the stock doesnt technically receive funds from you losing cash, however they are gaining money because the stock is growing in value.
Finally although you can wait and hope for the stock to drop again. i dont recommend this. What if the price never closes below your sell point again?
I have seen a stock rise from 2.00 to 111.00 for instance, could you afford such a move?
shorting in general is a method best utilised by traders and traders should always place a StopLoss. (a point at which a loss is closed to avoid losing more money.) |
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PenelopeM
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Shorting, or short-selling is a practice whereby you borrow and sell shares of a stock you don't own and you think is going to go down in price, then buy it back when it does drop, in order to re-pay the shares you borrowed back to your broker. You have a limited amount of time to return the shares you have borrowed, based on the requirement to deliver to the buyer the shares you sold.
Let's say, for example that I have a diversified portfolio of stocks: I have AAPL, BAC, PG, F, CMG, but I see that a stock like RIG is expected to slip by several points (perhaps due to the Disaster in the Gulf), I call my broker, and tell her to sell 50,000 shares of RIG while it is still at 60 and based on my homework I expect it to slip to 45. She lends me the 50,000 shares, sells them on my behalf, turns around and buys them back on my behalf when they drop. Now, I've made a tidy $750,000 (minus my broker's commission), and I return the shares to my broker. She has all her shares, I have my gain and we both are happy.
It CAN backfire on you and bite you in the wallet, however.
Suppose in our example above, instead of anticipating a drop in RIG, I am looking for a drop in WAG. So I borrow 50,000 WAG from my broker, have her sell them on my behalf at 50, expecting them to slip to 40. The next morning, WAG announces outstanding results for the quarter and shoots up to 60. Well, now my broker STILL has to buy these shares back on my behalf, so that I can return them to her, but I'm gonna take it in the shorts to the tune of $500,000 (plus the broker's commission).
Be aware that noted stock investing authorities including Jim Cramer of CNBC advise against "home-gamers' engaging in "short-selling." |
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cainvest1
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To answer your questions:
1. There is no time limit to cover a short.
2. You are incorrect on the assumption about the difference passing to the stock owner. He/she 'lends' the stock to you through the broker by participating in a margin arrangement. There is no benefit to the owner of the stock that is shorted. Indeed, he/she might not even know that the stock has been lent.
3. In your short position your cash/margin availability will fall as the shorted stock rises. If you have enough cash to cover you are fine. |
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zman492
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<<<Let's say you have 300k in your account, and you decide to short 50k of a stock, with the other 250k remaining cash in your account.>>>
The amount of cash in your account goes up to $350k, not down to $250k. You sold stock for $50k so that $50k is added to your account.
The total value of your account does not change. At the same time you get a $50k cash credit you have $50K worth of stock debited from your account.
<<<My question is: Is there a time limit that you will have to cover (buy the stock back)?>>>
There is no time limit in the United States, but there are circumstances where you would have to cover the short. Among them are the following:
(1) Your broker is no longer able to borrow the stock from anyone.
(2) You get a margin call.
(3) The company whose stock you shorted is acquired by another company.
(From some things I have read there I believe are time limits in some places outside the United States, but I am not certain.)
<<<Based on what I understand, if the price of the stock goes up after you short it, they will transfer the difference from your account to the account of the stock owner>>>
That is not true for short stock positions. What they will do is increase the amount of margin you are required to have.
The only time cash will be transferred from your account to the account of the person from whom it was borrowed is when the stock pays a dividend. (If you short a stock you are responsible for paying all dividends.)
<<<you can basically wait as long as you want (since you have more than enough funs in your account) until the stock price falls back down. Is this true?>>>
Whether or not you have enough funds in your account depends upon how much the stock price goes up.
It is also a mistake to assume the stock price will always fall back down to the price at which you shorted it, or even to anything close to that price. For example, look at what happened to Apple stock and consider what would have happened to you if you had shorted it in 2004 and waited for the price to come back down again.
http://finance.yahoo.com/q/bc?s=AAPL&t=my&l=off&z=m&q=l&c= |
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