Going Short

In finance when you open a short position or equivalently go short in a security, this means you sell while you do not own the security and will profit if the price of the security goes down. Once the price is down you buy the shares you sold for a lower price. If however the shares do not go down but go up, you can theoretically loose an unlimited amount of money. Going short is contrasted with going long.

We only trade in shares and not in options and other derivatives so when we go short we open a new position and sell shares we do not own.

Open SHORT position

To go SHORT with your online broker you should:

Click on the Share you want and choose: New Order

Action: SELL or OPEN - SELL (depends on your broker)

Order type: PRICE LIMIT - never choose Market unless you really know what you are doing

Enter the price per share you want to receive and a time-limit for the order (today)

Before you actually send it to the Stock Exchange your broker will verify whether you have sufficient funds, if the stock value is within a regular range of the current market price and finally provide you with a total overview of your order and the related costs.

Example:
Shares Company X trade at 100 USD
You believe they are overvalued and expect the price to come down.
You go SHORT and sell 100 shares @ 100 USD
Therefore you will receive 100 x 100 = 1,000 USD
If the price drops to 80 USD you buy back the 100 shares @ 80 USD: 80 x 100 = 800 USD and you earn 200 USD
Equivalently you loose 200 USD if the shares go up to 120 USD

Close SHORT position

To close a short position and buy the shares you do not own but you did sell you should:

Click on the shares you want to buy and choose: New Order

Action: BUY or CLOSE - BUY (depends on your broker)

Order type: PRICE LIMIT - never choose Market unless you really know what you are doing

Enter the price per share you want to pay and a time-limit for the order (e.g. today)

Please note:

Not all brokers offer to go short

If your broker does not have the shares at hand your order is either wait-listed or not accepted and you will have to try it later on again.

Orders are not always completed in one transaction. Imagine you want to buy 100 shares from Company X for 1 USD. On offer are 100 shares for 1.02 USD and 25 for 1 USD. Your broker will buy these 25 shares and once some one else is elling for 1 USD your broker will buy the rest.

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