Chapter 02 - Slides 25-42 - Shorting Stock

Author(s): Paiano, Frank
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Selling short: Making money when investment prices fall (Huh? What?) "Buy low, sell high." You have heard the saying many times. But did you know that you can do the exact opposite? You can, "sell high, buy low." The technique is called selling short. Instead of making money when an investment goes up in price, this technique allows you to make money when an investment goes down in price. Although it is difficult to believe, you sell a security -- a stock, for example -- that you do not own. You borrow it from someone else. You then wait for the price to go down and buy it back, pocketing the difference. However, if the price goes up in value, you will lose money. It is potentially very risky since there is no limit to how high the price of a stock can go. Needless to say, selling short is more suited to traders and speculators, not long-term oriented prudent investors.


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