| Stocks Trading Tips - Short Squeeze |
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To profit from the decline in price of a security such as a stock or bond a strategy called short selling or shorting may be used. Normally in the stock market the overwhelming majority of investors go long on an investment. That is to say they buy a security with the anticipation of a rise in its price. To make money from a declining stock a short seller can borrow the security and sell it immediately. If the price of the security actually does decrease then the short seller can buy the borrowed security back at a lower price and pocket the difference. For clarification consider the following example: Assume that shares in OPQ Company are currently being sold for $10 per share. Now short seller Mr. Green borrows 100 shares of OPQ and sells them immediately for a total of $1000. If the price of OPQ falls to $5 per share, Mr. Green would buy back 100 shares of OPQ for a total of $500. Then he would give the 100 shares back to the original owner and make $500 of profit. In another scenario if the shares of OPQ increase in price to a value of $20 per share, then the short seller would have to buy back the 100 shares for $2000 and absorb a loss of $1000. Short selling is often considered to be a positive market forceAn important point to consider is that a stock investor involved in short selling may be prone to a short squeeze.
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