Hello YouTube, Todd Ault here, and Welcome to Wall Street Words! Today's word is "Short-Selling" or to "Sell Short" a stock.
Today's word is "Short-Seller" or to "Sell Short" a stock. Really simple definition here, but people get it confused all the time. Just imagine you sell something first before you buy it. So, if you sell a stock short $20.00, you wanted to go down. It goes down to $15.00, you buy it back, you make a $5.00 profit. However, selling stocks short can be very dangerous. When a stock goes up in value you have unlimited risk. But, when you sell it short at $.20.00, it can only go to zero. When you sell it short at $20.00, it can go up unlimited. Now, in theory, that's unlimited risk when you're short-selling stock and you have to go to a broker to borrow that stock because you have to own it or borrow it first to sell it. You sell it first, you buy it back later. You're betting on the price of the stock going down. There are many reasons why people sell stocks short. There's hedging reasons why they could sell stock short, their long something else, the line different sort of security or they could just be betting that the company is going to blow up or not do as well. Short-selling is a very important part of the capital markets and done all the time generally by professional investors. But, those of you who are not professional investors, prepare to get your head cut off one day. I'll give you an example. I was short Amazon many years ago and in one single day that stock went up $100.00 a share. That was a $400,000 loss for me and a very valuable lesson. "Selling-short" or "Short-Selling", that's the word of the day.
Definition - The sale of an asset or stock the seller does not own. It is generally a transaction in which an investor sells borrowed securities at the current market price in anticipation of the market stock price declining in the future when the seller is then required to return an equal number of shares. In contrast, a seller owns the security or stock in a long position.
The main advantage of a short sale is that it allows traders to profit from a drop in price. Short sellers aim to sell shares while the price is high, and then buy them later after the price has dropped. Short sales are typically executed by investors who think the price of the stock being sold will decrease in the short term (such as a few months). Short sales are margin transactions, and their equity reserve requirements are more stringent than for purchases. Brokers borrow the shares for short sale transactions from custody banks and fund management companies that lend them as a revenue stream. Institutions that lend shares for short selling include JPMorgan Chase & Co. and Merrill Lynch Wealth Management.
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