Recovering A Loss Thru Margin
Q: Could someone explain to me how to short a stock? I currently own a stock (let's call it xyz). My entry price is $4. The stock is currnetly trading at $3, and I think it is continuing the down trend. Should I short the stock to offset the loss of my original buy? Should I also sell my original stocks at the same time? Can someone explain how this would work?
A:
You short a stock when you think it will go down. You first learn
about the mechanics of stock trading, then you ask your broker to
establish a margin account for you which allows you to short
stock, and place whatever stock and/or funds in it your bnroker
requires.
Then you call your broker and ask him to sell short X shares of
ABC
stock price rises too much, the broker will ask you to place more
stock or cash into your account.
The broker has to be able to borrow the stock from someone; if
that source dries up he might take you out of your short position
whether or not you are ready to have him do so.
As a general rule, only stocks trading above $5 will be available
for short sales, so your example of having a $4 stock which went
down to $3 is not usually able to be shorted.
More importantly, since shorting is done when you think the stock
will fall, why would you continue to hold the stock you bought at
$4 if you are also thinking of shorting it? That's not logically
consistent. Since you think your stock will go down, sell what
you own and take the loss.
From what you have written, I will assume you need to learn much
more about trading stocks before you consider shorting.
The reason you short a stock is to sell high and buy low. since you
already own this stock you have two choices. Keep or sell. If you
sell short, and you may not be able to do so, some stocks do not
qualify, you would have to buy the stock back or deliver the shares
you currently own.
You are at risk here, if the stocks goes up, you must purchase or
deliver, losing your profits, having sold at a price lower than you
purchased.
Just to add to Art's comments, if you went long, and the trade went
against you, and you think it will continue to go against you, then
the logical thing to do is to close out the long trade, and depending
on how gutsy you are you go short. Aggressive traders
go short when they close out a long position, and go long when they
cover a short position. Such trading strategies account for a lot
of the volatility in some of the leading issues. Since the original
poster talked about shorting I assume he is an aggressive trader.
In my books shorting is aggressive.