Shorting stocks is a very interesting strategy. It involves selling a stock today and then buying it back later on. In other words it is the opposite of traditional Investing and works in a completely different way.
That is a fantastic way to make some extra money when stocks are 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.
One other thing that you might want to consider is that stocks in general go up. 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.
If you allow your short positions to stay open for a long time period it can turn around to bit you in the butt.This is why you really need to keep your losses small by using things like stop losses which will get you out if you lose a small amount of money before those losses become too big to handle.
3. You Have to Pay Dividends
Dividend paying stocks really work against short sellers. This is because you have to pay the dividends on every stock that you short.
Because of this it is normally a smart idea not to short stocks which have a high dividend.
