Veteran investors know it is possible to make money in any market and any situation if you understand the fundamentals.
Don't believe it? Here is a quick question. How do you make money on a stock you do not own when the price of the stock is falling?
The answer? Simple. It's called a short sale.
Short selling stock is a popular method of betting against a stock by borrowing the security. It works like this:
- Borrow the stock from your brokers inventory, margin account or another firm.
- Sell the stock.
- Sale proceeds are credited to your account.
- Close the short by "covering" or buying back the same number of shares of the same stock and returning them to your broker.
- Pay transaction and other fees to broker.
Although it sounds simple, there are risks to contend with including:
- It is possible to lose more money than you invested
- Short selling stock uses margin trading which requires a minimum amount of cash as collateral (typically 25 percent). If your position slips to that level, it is subject to a margin call where you must come up with the cash or liquidate your position.
- Short squeeze phenomena can take place if the stock actually begins to increase rapidly while short sellers all try to cover their positions.