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Shorting Stocks
Investors with margin accounts also have the ability to short sell stocks. Short selling is not recommended for the novice investor, since potential losses are much higher than with buying a stock. In a short sale, an investor bets that the stock price is going to drop. He borrows stock from the brokerage house and sells it on the open market. He then gets to keep the proceeds of the sale, with the obligation to buy the stock back at a later date and deliver it to the broker. The investor hopes that the stock will drop and he will be able to purchase it at a lower price in the open market, deliver it to the broker, and pocket the difference in price. If the stock does the opposite and begins rising quickly, the investor can lose his initial investment and more. As the stock rises, the broker may issue a margin call, requiring the investor to deposit more equity in his account. |
