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Wednesday, July 14, 2010

Short Selling - explained

Short selling refers to fast selling ie stocks are held for a very less period.

Here I am writing about some very basic points one should know about short selling(which I gathered from Websites) and putting the best ones together.

The first question which comes to one's mind is what Short selling actually is? and you'll be happy to know that answer to this question is not very complex :)

Answer - A short selling is when a trader borrows a stock on margin and sells it on the open market. These borrowed shares will come from the inventory of the trader's broker. Traders profit on short selling by first selling the security, then buying it back at a lower price. However, if the security rises, the trader will incur a loss.

Q- So what type of fees or tax one has to pay for practicing short selling?
A- When a trader shorts a stock he or she will incur interest for the margin used to borrow the stock. Margin interest rates range from 4% - 8%. The simple interest is calculated on a daily basis and is debited from your account at the end of the month. If you only carry a security for two days, then the trader will only have to pay interest for that holding period.

Short Selling is one of the most riskiest of all selling in stock markets.
Value Investing and Behavioral Finance: Insights into Indian Stock Market Realities
Some strategies for making Short selling profitable are as follows:
There are a number of strategies that can be used to profit on the falling value of a security. Traders can increase their odds of success by first determining if the overall market is in a downtrend. The next step is to identify the weakest sectors within the market. This top down approach will ensure the trader locates the weakest stocks which have the greatest of odds of continuing lower in the near future. Traders should stay away from penny stocks, as short squeezes in these securities can be as high as 50%-75% in a matter of days. Traders should focus on securities priced over $20 dollars that have a high float. This will also ensure the broker does not have strict margin requirements for the security. At times, if a stock is too volatile a brokerage firm will require the trader have 200% of the value of the position in cash, and some brokerage firms will remove the stock from its easy to borrow list altogether if it appears to be too volatile. We have all seen this during the '08 credit crisis, as the SEC removed over 800 stocks from the allowable short list.

1 comment:

  1. Keep up this pleasant text, added to my ie feed.



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