The Complete Guide to Selling Stocks Short: Everything You Need to Know Explained Simply
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Shopbop Designer Fashion Brands. Along the way, however, he popularizes some big, hairy ideas. The other way Malkiel is instructive is a little paradoxical: By showing how hard it is for anyone to get a trading edge, he also shows that anyone can invest and do reasonably well—just by buying an index fund.
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If the market is efficient, you might reason, who am I to fret when prices keep climbing higher? Still, the inherent wisdom of financial crowds is a beguiling idea that deserves a strong counter-narrative. Shiller, who won a Nobel Prize for economics in , devotes a chapter of Irrational Exuberance to dismantling the orthodox versions of efficient-market theory and random walks.
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He reasons that if stock prices really are efficient, you ought to be able to see that in the historical record. For example, share prices would rise in anticipation of companies doing well and paying investors higher dividends. In fact, Shiller found that prices were far more volatile than future dividends would justify. In the first edition of Irrational Exuberance noted that stock prices looked, well, exuberant, just in time for the tech stock bubble to burst. In the second edition, published in , Shiller showed that housing prices were wildly above historical norms.
And we all know what happened next. Most investors buy shares of various companies and depending on their trading mentality, either sock them away for the long term in their investment portfolios buy-and-hold investors or trade them on a short-term basis day traders and swing traders.
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For example, many mutual funds can only go long, and are prohibited from shorting stocks. Stock purchases can either be made in a cash account, where the investor puts up the full amount of the stock purchase; or in a margin account, where the investor puts up part of the buy transaction amount for the stock purchase and borrows the rest from the broker using the stock as collateral.
Short selling, on the other hand, is usually conducted only in a margin account.
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While investors go long in expectation that the stock will appreciate in price, traders go short in anticipation that the stock will tumble. As noted earlier, short selling makes it possible to sell what one does not own. At a future point in time, the short seller will cover the short position by buying it in the market and repaying the loaned stock to the broker.
Your net profit will be lower, owing to the costs involved with short selling.