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You have probably heard the terms "being long" or "being short" in a stock. What does "long" and "short" mean. Well, this is certainly not the length of your skirt! There is a world of difference in being long or short in a stock.
Long Position
If you hold a long position in a stock ("being long"), it means that you buy the stock and you own it and for you to make money the price of the stock must rise. So, you buy low and sell high; I'm sure you have all heard that one before! This is the way most people invest in stocks.
Short Position
Being short in a stock is a little complicated. MsFiscallyFit considers holding a short position ("being short") in a stock an advanced technique. Taking a short position, better known as "selling short" or "short selling", means that you sell a stock you don't own. What do you mean, "Sell a stock you don't own?!!" The stock is actually on loan to you through your stockbroker and at some time point you will buy back the stock to repay the loan. This is known as covering your short position. You make money by buying the stock back at a lower price than you sold it - sell high and buy low. Are you thoroughly confused now?
Here is an example of how it might work. You think that Faye's Awesome Chocolate Treats (stock symbol = "FAT") has had its time in the sun and is about to melt down because everyone is going on the protein diet and are not going to be eating chocolate treats anymore. The stock "FAT" is priced at $25/share. You have done your research - very important to do - and you have determined that "FAT" is ready to start declining in price. You decide to short sell 100 shares of "FAT" at $25/share and $2500 less commissions is deposited into your "short account" (a holding account). The $2500 remains there until you purchase the stock back to cover your short position. As you predicted, "FAT" starts to melt down and declines in price to $20/share. You cover your short by buying back the 100 shares you borrowed for $2000 (100shares @ $20/share) and you get to keep the difference between the money in your short account and the cost of buying back the stock. A tidy profit of $500 less commissions (those brokers have to get their lattes also).
What if you predicted wrong and the price of "FAT" went up in price and you decide to buy the stock back at, $30/share, a higher price than you sold it? Now, you would pay the difference between what the stock cost to buy back and the amount in your short account. This example nets you a loss of $500 plus broker commissions. No lattes this week.
An important point of being short in a stock is that you will be responsible to pay to the broker any stock dividends that are paid during the time you have borrowed the stock. Shorting stocks can be profitable, but as in all investments, it can be risky. Short selling should really only be done by someone who is comfortable with trading stocks and has done her research. As with all stock trades, if you are right about the price movement of a stock, you make money. If you are wrong, you lose money.
Next up - I want Margin not butter.
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